AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 6, 1999
COMMISSION FILE NO. 333-65583
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 3
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
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NEVADA 7371 98-0167013
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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ROBERT KUBBERNUS, CEO
JAWS TECHNOLOGIES, INC.
1013 17TH AVENUE SW T2T 0A7 1013 17TH AVENUE SW T2T 0A7
CALGARY, ALBERTA CANADA CALGARY, ALBERTA CANADA
(403) 508-5055 (403) 508-5055
(Address, including zip code, and telephone number (Name, address, including zip code, and
including area code, of registrant's principal Executive offices) telephone number including area code, of agent for service)
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Copies to:
ROBERT L. SONFIELD, JR., ESQ.
SONFIELD & SONFIELD
770 S. POST OAK LANE
HOUSTON, TEXAS 77056
(713) 877-8333
FACSIMILE: (713) 877-1547
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
possible after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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CALCULATION OF REGISTRATION FEE
Proposed Maximum Proposed Maximum
Title of Securities Number of Shares Offering Price Per Aggregate Offering Amount of
Being Registered Being Registered Share (1) Price (1) Registration Fee
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a. 1,912,317. . . . . . . . . $ 0.1118 $ 213,798 $ 64.79
b. 1,642,857. . . . . . . . . $ 0.28 $ 460,000 $ 139.40
c. 625,000. . . . . . . . . . $ 0.40 $ 250,000 $ 75.75
Common Stock Underlying . . . . d. 923,077 $ 0.65 $ 600,000 $ 181.82
Thomson Kernaghan Debentures. . e. 8,700,000 $ 0.40 $ 3,480,000 $ 1054.55
- ------------------------------- ----------------- -------------------- -------------------- -----------------
$ 121.21
Common Stock Underlying . . . . f. 1,428,572 $ 0.28 $ 400,000 $ 181.82
Thomson Kernaghan Warrants. . . g. 923,077 $ 0.65 $ 600,000
- ------------------------------- ----------------- -------------------- --------------------
Common Stock Underlying Bristol
Asset Management Warrants . . . 1,000,000 $ 0.70 $ 700,000 $ 212.12
- ------------------------------- ----------------- -------------------- -------------------- -----------------
TOTAL . . . . . . . . . . . . . 17,154,900 $ 6,703,798 $ 2031.46
- ------------------------------- ----------------- -------------------- --------------------
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(1) Calculated pursuant to Rule 457 (g).
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant shall
file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with section 8(a) of
the securities act of 1933, or until the registration statement shall become
effective on such date as the securities and exchange commission, acting
pursuant to said section 8(a), may determine.
EXPLANATORY NOTE
----------------
This registration statement covers the primary offering of shares of common
stock by JAWS Technologies, Inc., a Nevada corporation, and the reoffering of
shares of common stock by certain selling security holders. This statement is
being filed in order to register, on behalf of the selling security holders, a
total of 17,154,900 shares of common stock as follows: (i) 13,803,251 shares of
common stock issuable to Thomson Kernaghan & Co. upon conversion of debentures,
(ii) 2,351,649 shares of common stock issuable to Thomson Kernaghan & Co. upon
exercise of warrants, and (iii) 1,000,000 shares of common stock issuable to
Bristol Asset Management upon exercise of the warrants. The secondary shares are
being registered in order to provide the holders thereof with freely tradeable
securities, but the registration of such shares does not necessarily mean that
any of such shares will be offered or sold by the holders thereof.
The selling stockholders may from time to time offer and sell all or a
portion of the secondary shares in the over-the-counter market, in negotiated
transactions or otherwise, at prices then prevailing or related to the then
current market price or at negotiated prices. The secondary shares may be sold
directly or through brokers or dealers, or in a distribution by one or more
underwriters on a firm commitment or best efforts basis. To the extent
required, the names of any agent or broker-dealer and applicable commissions or
discounts and any other required information with respect to any particular
offer will be set forth in an accompanying Prospectus Supplement. See "Plan of
Distribution." Each of the selling stockholders reserves the sole right to
accept or reject, in whole or in part, any proposed purchase of the secondary
shares to be made directly or through agents.
The selling stockholders and any agents or broker-dealers that participate
with the selling stockholders in the distribution of secondary shares may be
deemed to be 'underwriters' within the meaning of the Securities Act of 1933, as
amended (the 'Securities Act'), and any commissions received by them and any
profit on the resale of the secondary shares may be deemed to be underwriting
commissions or discounts under the Securities Act.
There will be no proceeds received by JAWS Technologies, Inc., from the
sale of any secondary shares by the selling stockholders and JAWS Technologies,
Inc. has agreed to bear the expenses of registration of the secondary shares,
other than commissions and discounts of agents or broker-dealers and transfer
taxes, if any.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there by any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
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PROSPECTUS
JAWS TECHNOLOGIES, INC., A NEVADA CORPORATION
17,154,900 SHARES OF COMMON STOCK
This is an offering of 17,154,900 shares of common stock of JAWS
Technologies, Inc. ("JAWS"), a Nevada corporation, held by certain of JAWS
selling security holders. Of the 17,154,900 shares being offered by the selling
security holders, 3,351,649 shares are issuable upon the exercise of warrants
owned by the selling security holders. JAWS will not receive any proceeds from
the sale of the shares but JAWS will receive proceeds from the selling security
holders if they exercise their warrants.
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JAWS Technologies, Inc.
1013 - 17th Avenue SW T2T 0A7 JAWS has developed encryption software to
Calgary, Alberta CANADA . . . sell through Internet service providers.
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JAWS common stock currently trades
on the OTC Bulletin Board under the
Trading Symbol "JAWZ"
On August 4, 1999, the closing bid price for JAWS common stock was $2.02.
_________________________
This investment involves a high degree of risk. Investors should purchase
shares
only if they can afford a complete loss. See "High Risk Factors" beginning on
page 4.
_________________________
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS AUGUST 6, 1999
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i
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TABLE OF CONTENTS
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PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
HIGH RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
MARKET PRICE AND DIVIDENDS OF JAWS'S COMMON EQUITY AND OTHER STOCKHOLDER MATTERS 9
DIVIDEND POLICY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
CAPITALIZATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
SELECTED FINANCIAL DATA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
MANAGEMENT'S DISCUSSION AND PLAN OF OPERATION. . . . . . . . . . . . . . . . . . 11
BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
PRINCIPAL SHAREHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . . . . . . . . . . . 26
SELLING SECURITY HOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
DESCRIPTION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
SHARES ELIGIBLE FOR FUTURE SALE. . . . . . . . . . . . . . . . . . . . . . . . . 28
PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
LEGAL MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
EXPERTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
WHERE YOU CAN FIND MORE INFORMATION. . . . . . . . . . . . . . . . . . . . . . . 29
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . F - 1
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3
PROSPECTUS SUMMARYPROSPECTUS SUMMARY
JAWS TECHNOLOGIES, INC.
JAWS Technologies, Inc., a Nevada corporation owns 100% of the capital
stock of JAWS Technologies, Inc., an Alberta corporation, (together, throughout
this prospectus, referred to as "JAWS"), is a company attempting to produce and
mass market computer software that is developed for the purpose of encrypting
data before its transmission and unscrambling the data when it is received by
the proper person. JAWS believes that Internet service providers ("ISP"), with
whom JAWS has agreements, will market and sell JAWS' encryption software. JAWS'
executive offices are located on the second floor at 1013-17th Avenue, S.W.,
Calgary, Alberta, Canada T2P-2T5, JAWS' telephone number is (403) 508-5055,
JAWS' facsimile number is (403) 508-5058 and JAWS' website is
http://www.jawstech.com.
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THE OFFERING
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Common Stock outstanding prior to the offering 13,061,949 shares
Common Stock offered . . . . . . . . . . . . . 17,154,900 shares(1)
--------------------
Common Stock outstanding after the offering. . 30,216,849 shares(2)
====================
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- ----------------------------
(1) Assumes issuance of the 13,803,251 shares underlying Thomson Kernaghan
& Co., Ltd. debentures and 2,351,649 shares underlying Thomson Kernaghan & Co.,
Ltd. Warrants, and 1,000,000 shares of common stock issuable to Bristol Asset
Management upon exercise of warrants.
(2) Does not include 10,187,270 issued and outstanding common shares,
2,392,600 shares of common stock issuable under the 1998 JAWS' Stock Option Plan
and 2,173,282 common shares issuable pursuant to outstanding options and
warrants.
SUMMARY FINANCIAL DATA
CONSOLIDATED FINANCIAL STATEMENTS
The summary of data in the table is derived from the JAWS' audited
consolidated financial statements and related notes. The data should be read in
conjunction with the complete consolidated financial statements and the related
notes contained elsewhere herein.
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SUMMARY OF SELECTED CONSOLIDATED FINANCIAL INFORMATION
THREE MONTHS ENDED MARCH 31, 1999 TWELVE MONTHS ENDED DECEMBER 31, 1998
(UNAUDITED) PERIOD FROM JANUARY 27, 1997 TO DECEMBER 31, 1997
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Results of Operations
- ------------------------------
Revenue $ 3,047 $ 29,068 $ 0
Expenses $ 1,205,032 $ 3,105,355 $ 136,854
Net loss for the period $ 1,201,985 $ 3,076,287 $ 136,854
Financial Position
- ------------------------------
Current Assets $ 199,810 $ 194,549 $ 7,611
Working Capital (Deficiency) $ (909,287) $ (431,166) $ (25,365)
Total Assets $ 506,915 $ 273,379 $ 9,931
Total Liabilities $ 1,782,573 $ 847,038 $ 111,135
Stockholders' Deficiency $(1,275,649) $ (573,659) $(101,204)
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THE COMPANY
JAWS Technologies, Inc., is a Nevada corporation which owns 100% of the
shares of JAWS Technologies, Inc., an Alberta corporation, with offices in
Alberta, Canada (together, throughout this prospectus, referred to as "JAWS").
JAWS has developed software utilizing encryption algorithms of 4,096 bits to
scramble data and has developed a business plan to mass produce and distribute
that software.
JAWS' software operates under Windows 3.1, Windows 95, Windows 98, and
Windows NT. Other platforms are currently under development.
JAWS' software has been in development for approximately 15 years. In May,
1998, JAWS concluded the research and development stage for its first product
and sold JAWS L5 Data Encryption Software. JAWS now employs a sales and
marketing team to support the product and JAWS has signed two agreements with
ISPs who market and sell JAWS' products and services.
JAWS believes that there are numerous markets for the its software. JAWS
believes value added resellers ("VAR") are a significant potential market for
its products. External software developers can use JAWS' software as an added
benefit in their product to enhance product offerings. Accounting software
programs, database developments, e-mail programs and communication software are
all potential channels for JAWS' software. Additional potential customers
include the smart card industry, hand-held computing devices,
telecommunications, and access control devices. JAWS' products provide security
enhancements to existing products offered by other manufacturers. Direct sales
channels for JAWS include ISPs, data warehouses, corporate networks and personal
computer users.
On September 25, 1998, JAWS entered into a debenture acquisition agreement
(the "Debenture Agreement") with Thomson Kernaghan & Co. Ltd. ("Thomson
Kernaghan"). This agreement allowed Thomson Kernaghan to purchase from JAWS up
to two million dollars ($2,000,000) of a 10% convertible debenture and warrants
to purchase 1,428,572 common shares at $0.28 per share. On April 27, 1999, JAWS
and Thomson Kernaghan amended the Debenture Agreement. The amended Debenture
Agreement, amongst other modifications, increased the maximum allowable dollar
value of the purchasable convertible debentures under the Debenture Agreement,
from two million ($2,000,000) dollars to five million ($5,000,000) dollars, and
fixed the conversion price as follows:
1. $1,520,000 of the $5 million available under the debenture agreement
has been advanced as of August 5, 1999. Of this amount, $210,000, plus interest
in the amount of $3,798, has been noticed for conversion at $0.1118, that will
result in the issuance of 1,912,317 shares.
2. Of the remaining balance:
(a) $210,000 may be converted at a fixed price of $0.28 per common
share;
(b) $250,000 may be converted at a fixed price of $0.28 per common
share;
(c) $250,000 may be converted at a fixed price of $0.40 per common
share;
(d) $600,000 may be converted at a fixed price of $0.65 per common
share; and
(e) The remaining increments of the financing will be drawn down at the
minimum conversion price of $0.40, within a reasonable time period after the
effective date of this registration statement.
3. JAWS is not obligated to take down the financing from Thomson
Kernaghan and may re-negotiate the conversion price prior to any advance.
In connection with the amended debenture agreement, Thomson Kernaghan will
receive warrants to purchase 923,077 common shares at $0.65 per share, a finance
fee of 10% on the first $2,000,000 funded and 8% of the amount funded in excess
of $2,000,000. The finance fee may be paid in cash on funding or a combination
of cash and restricted shares. JAWS, at its discretion, may pay up to 37.5% of
the finance fee by the issuance of the restricted shares.
JAWS intends to add the net proceeds from the amended Debenture Agreement,
and from the exercise of the underlying warrants, to the general funds of JAWS.
These funds are to be used for working capital and other general corporate
purposes. See "Management's Discussion and Analysis of Financial Condition and
Results of Operation -- Financing". JAWS will pay for all of the expenses of
the registration statement, of which this prospectus is a part, estimated to be
approximately $150,000.
JAWS' executive offices are located at 1013 - 17th Avenue SW Calgary,
Alberta, Canada T2T 0A7 and JAWS' telephone number is (403) 508-5055.
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HIGH RISK FACTORSHIGH RISK FACTORS
AN INVESTMENT IN THE SECURITIES OFFERED HEREBY IS SPECULATIVE IN NATURE AND
INVOLVES A HIGH DEGREE OF RISK. IN ADDITION TO THE OTHER INFORMATION CONTAINED
IN THIS PROSPECTUS, THE FOLLOWING FACTORS SHOULD BE CONSIDERED CAREFULLY IN
EVALUATING JAWS AND ITS BUSINESS BEFORE PURCHASING THE SECURITIES OFFERED
HEREIN. THIS PROSPECTUS CONTAINS, IN ADDITION TO HISTORICAL INFORMATION,
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES. JAWS' ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS. FACTORS THAT MIGHT CAUSE OR CONTRIBUTE TO SUCH DIFFERENCE INCLUDE,
BUT ARE NOT LIMITED TO, THOSE DISCUSSED BELOW, AS WELL AS THOSE DISCUSSED
ELSEWHERE IN THIS PROSPECTUS. RISKS CONCERNING JAWS:
JAWS HAS A LIMITED OPERATING HISTORY AND CONTINUED OPERATING LOSSES
JAWS was incorporated on January 27, 1997, and did not begin producing
software until October 1997. To date, JAWS has produced and sold a number of
copies of software and has also produced promotional demos. JAWS has a short
operating history and limited number of software sales. JAWS does not have
significant revenues. Investors in this offering will have little meaningful
information about JAWS to assist in evaluating whether JAWS will ever be able to
successfully produce and market JAWS' software or whether an investment in JAWS
will be profitable or unprofitable.
Because of JAWS' short operating history and limited sales, it faces all
the risks and problems associated with a new business, including the existence
of operating losses. For example, between the time of JAWS incorporation and
March 31, 1999, JAWS has incurred cumulative losses of $4,415,126 and an
accumulated deficit of $4,415,126. JAWS anticipates that losses will continue
in the future unless it is able to produce revenue from sales of JAWS' software.
RISKS ASSOCIATED WITH THE PROTECTION, EXPIRATION OF COPYRIGHT, TRADEMARKS AND
PATENTS PENDING AND INFRINGEMENT OF JAWS' PRODUCTS
JAWS' success depends upon its proprietary encryption technology. JAWS
relies on a combination of contractual rights, copyright, trade secrets,
know-how, trademarks, non-disclosure agreements and technical measures to
establish and protect JAWS' rights. JAWS cannot assure investors that it can
protect its rights and prevent third parties from using or copying JAWS'
technology.
JAWS does not presently own any patents, copyright registrations, or
registered trademarks, but it has filed a U.S. patent application for the L5
Data Encryption algorithm. However, there is no guarantee JAWS will be
successful and receive a patent.
JAWS believes that its technology was independently developed and that it
does not infringe on the proprietary rights or trade secrets of others.
However, JAWS cannot assure investors that it has not infringed on the
technologies of third parties or that third parties will not make infringement
violation claims against JAWS. Any infringement claims against JAWS may have a
negative effect on our ability to produce software.
International U.S companies currently use all or a portion of the name
"JAWS" in connection with products or services in industries different from that
of JAWS.
RISKS ASSOCIATED WITH AUDITOR'S GOING CONCERN OPINION
JAWS' audited financial statements include a statement that JAWS' recurring
losses from operations and net capital deficiency raise substantial doubts about
JAWS' ability to continue as a going concern. While JAWS has secured funding to
continue operations, the financing terms are not favorable for JAWS; further,
there is no guarantee that JAWS will cease to have recurring losses from
operations or cease to have a net capital deficiency in the near future.
RISKS OF NOT BEING ABLE TO COMPETE WITH LARGER SOFTWARE COMPANIES
The market for the type of encryption software JAWS has designed is
extremely competitive and JAWS expects that competition will increase in the
future. JAWS' competitors include many large companies that have substantially
greater market presence and financial resources than JAWS does. For example,
JAWS will compete with RSA and PGP Network Associates, national accounting
firms, systems consulting and implementation firms, application software firms,
service groups of computer equipment companies, facilities management companies,
general management consulting firms and programming companies and other
national, regional and local companies, for a greater share of the encryption
software market.
JAWS believes that its ability to compete successfully depends on a number
of factors including:
the design of high performance and quality encryption software;
developing a market presence;
the timely delivery of JAWS' encryption software;
competitive pricing policies for its products and services;
the timing and introduction of JAWS' products and services into
the market; and
its ability to keep up with existing and emerging industry
trends.
Current or increased competition may either prevent JAWS from entering, or
maintaining, a place in the encryption software production market. JAWS cannot
guarantee that it will have the financial resources or marketing and
manufacturing capabilities to compete successfully in the encryption software
production market. If JAWS cannot successfully compete, it will probably be
forced to terminate its operations. See "Business-Competition."
RISK OF JAWS' MARKETING STRATEGY BEING UNSUCCESSFUL
JAWS expects to derive substantially all of its sales revenue through
independent third parties who either resell or use JAWS' products to enhance
their own products. As of August 4, 1999, JAWS has executed agreements with two
(2) ISPs. No other contracts have been executed and JAWS cannot guarantee that
any other contracts will be signed. The terms of the agreements provide that
either party may terminate an agreement at any time. JAWS is unable to
determine how successful these providers will be in selling JAWS' software.
Furthermore, JAWS does not have any history or experience in establishing or
maintaining such third party support, and there can be no assurance that it will
be able to successfully support the JAWS' reseller network. If JAWS is unable
to provide such support, it may lose resellers and, consequently, distribution
of JAWS' products would be adversely affected. Additionally, most resellers
will offer competitive products manufactured by third parties. There can be no
assurance that JAWS' resellers will give priority to JAWS' products over
competitors' products. Finally, if JAWS is unable to support a reseller, it
will need to attract an additional or replacement reseller to sell JAWS'
products. There can be no assurance that JAWS will be able to convince a
sufficient number of additional or replacement resellers in order to assure that
JAWS' products will be successfully marketed, distributed and profitable or that
such additional or replacement resellers will be successful in selling JAWS'
products. Any reduction or delay in sales of JAWS' products by JAWS' resellers
would have a material adverse effect on JAWS' business, operating results and
financial condition.
RISK OF NOT BEING ABLE TO EXPAND JAWS' SOFTWARE PRODUCTION AND DISTRIBUTION
CAPACITIES
JAWS must increase its software production capacity and expand the JAWS'
marketing network to sell its software before it will have a chance to compete
in the marketplace. So far, JAWS has two (2) agreements with ISPs to sell JAWS'
products and services. No other contracts exist and JAWS cannot guarantee that
any other contracts will be signed. Without additional contracts it will be
difficult to successfully market and sell JAWS' services and products.
Increasing JAWS' manufacturing and marketing capacity will involve hiring
additional personnel, purchasing additional manufacturing equipment and spending
significant funds on advertising. The foregoing will require significant
capital expenditures, which will most likely increase JAWS' operating losses for
an indefinite period of time. JAWS' expansion plans will also place a great
deal of strain on its management team most of whom have not had experience
managing large complex business operations. JAWS cannot guarantee that it will
be able to expand its software production and marketing capabilities as planned.
If any of these obstacles prevent JAWS from expanding its software production
and marketing business, JAWS may be forced to terminate its operations.
RISK THAT PROCEEDS FROM AVAILABLE FINANCING WILL NOT BE SUFFICIENT
Developing, manufacturing and marketing software and information technology
solutions and JAWS' plans for expansion, as mentioned above, will require
significant amounts of capital. Since JAWS has no significant internal revenues
to finance its continuing operations and plans for expansion, JAWS is dependent
upon the proceeds from sales of its securities to satisfy its capital
requirements. JAWS believes that the proceeds it receives from the financing
discussed in this Prospectus will satisfy its capital requirements for twelve
months. After twelve months, JAWS will have to arrange for additional
financing, unless it is receiving revenues from sales of JAWS' products, to
finance its manufacturing and marketing operations at a sufficient level.
Financing options could include, but will not be limited to, additional sales of
JAWS' securities or an operating line of credit. If JAWS is unable to obtain
additional financing on satisfactory terms when needed, JAWS may have to suspend
its operations or terminate its operations altogether.
RISKS ASSOCIATED WITH NOT KEEPING JAWS' SOFTWARE AND RELATED PRODUCTS AND
TECHNOLOGY CURRENT AND COMPETITIVE
JAWS' success will depend in part on its ability to develop information
technology solutions that keep pace with continuing changes in information
technology, evolving industry standards and changing client preferences. The
information technology industry is subject to rapidly changing technology and
emerging competition. JAWS cannot assure investors that it will be able to
successfully identify new opportunities and develop and bring new products to
market in a timely manner, nor can JAWS guarantee investors that products
developed by its competitors will not make JAWS' products noncompetitive or
obsolete. Also, JAWS cannot assure investors that it will have the capital
resources or the ability to implement any new technology.
IMPACT OF THE YEAR 2000 ON JAWS' COMPUTER SYSTEMS
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the year 2000. Some older computer systems
store dates with only a two-digit year with an assumed prefix of "19" which
limits those older systems to dates between 1900 and 1999. If not corrected,
many computer systems and applications could fail or create erroneous results by
or at the year 2000.
JAWS has assessed the scope of its risks related to the problems these
computer systems may have related to the year 2000, and JAWS believes such risks
are not significant. In addition, JAWS is in the process of questioning JAWS'
vendors and business partners about their progress in identifying and addressing
problems related to the year 2000. However, no assurance can be given that all
of these third party systems or JAWS' computer systems will be year 2000
compliant.
JAWS' principal software products are year 2000 compliant. However,
because JAWS' products are designed to work with other software products
developed and sold by third parties, any failure of these third party software
products to be year 2000 compliant could result in the failure of JAWS' software
products to effectively operate. Any such failure could harm JAWS' reputation
in the market and could have an adverse effect on sales of JAWS' products and
its financial performance.
DEPENDENCE ON KEY PERSONNEL
JAWS' success depends on the efforts of its management team, including
Robert J. Kubbernus, Chairman and Chief Executive Officer, Tej Minhas,
President and Chief Operating Officer, Vera Gmitter, Vice President Operations,
and Riaz Mamdani, the Chief Financial Officer. Even though JAWS has employment
agreements with some members of JAWS' management team, JAWS' cannot guarantee
that these persons will continue their employment with JAWS. The loss of
services of one or more of the key people would have a negative effect on JAWS'
ability to conduct its operations. Currently JAWS does not have key man life
insurance on any of the members of JAWS' management team. JAWS' success also
depends on JAWS' ability to hire and retain additional qualified executive,
computer programming, engineering, production, investor management and marketing
personnel. JAWS cannot assure that it will be able to hire or retain necessary
personnel.
LIKELIHOOD THAT AN INVESTMENT IN JAWS WILL BE DILUTED
Dilution is the difference between the amount investors pay for a share of
common stock in this offering and the net tangible book value per share of such
common stock immediately after the offering. If investors invest in this
offering, they will incur an immediate and substantial dilution of the
investment. In addition, JAWS may issue a substantial number of shares of
common stock or preferred stock without investor approval. Any such issuance
of JAWS' securities in the future could reduce an investor's ownership
percentage and voting rights in JAWS and further dilute the value of an
investment.
LIMITED MARKET FOR JAWS' SECURITIES
There is currently only a limited trading market for JAWS' common stock.
JAWS' common stock trades on the OTC Bulletin Board under the symbol "JAWZ,"
which is a limited market in comparison to the NASDAQ system or the American
Stock Exchange. JAWS cannot assure investors that JAWS' common stock will ever
qualify for inclusion on the NASDAQ Small Cap Stock Market or that more than a
limited market will ever develop for JAWS' common stock.
RISK ASSOCIATED WITH PENNY STOCK RULES LIMITING THE LIQUIDITY OF JAWS' STOCK
JAWS' common stock currently trades on the OTC Bulletin Board at a price of
less than $5.00 per share and is subject to the Penny Stock Rules under the
Securities Exchange Act of 1934. These rules regulate broker-dealer practices
for transactions in "Penny Stocks." Penny stocks generally are equity securities
with a price of less than $5.00. The penny stock rules require broker-dealers
to deliver a standardized risk disclosure document prepared by the Security and
Exchange Commission that provides information about penny stocks and the nature
and level of risks in the penny stock market. The broker-dealer must also
provide the customer with current bid and offer quotations for the penny stock,
the compensation of the broker-dealer and its salesperson and monthly account
statements showing the market value of each penny stock held in the customer's
account. The bid and offer quotations, and the broker dealer and salesperson
compensation information, must be given to the customer orally or in writing
prior to completing the transaction and must be given to the customer in writing
before or with the customer's confirmation.
In addition, the penny stock rules require that prior to a transaction, the
broker and/or dealer must make a special written determination that the penny
stock is a suitable investment for the purchaser and receive the purchaser's
written agreement to the transaction. These additional penny stock disclosure
requirements are burdensome and may reduce purchases of this offering and reduce
the trading activity in the market for JAWS' common stock. As long as JAWS''
common stock is subject to the penny stock rules, investors in this offering may
find it more difficult to sell their securities.
RISKS ASSOCIATED WITH MARKET ACCEPTANCE OF JAWS' PRODUCT LINE
JAWS' success depends on whether or not its products are accepted in the
marketplace. Investors should be aware that companies introducing new products
into the market are subject to a high level of uncertainty and risk. Because
the market for JAWS' software is new and evolving, JAWS cannot predict the size
and future growth rate, if any, of the market. JAWS cannot assure investors
that the market for JAWS' software will develop or that demand for JAWS'
software will emerge or become economically sustainable. Market acceptance of
JAWS' products depends on JAWS' ability to establish a brand image and a
reputation for high quality, and differentiate JAWS' products from competitors.
There can be no assurance that JAWS' products will be perceived as being of high
quality and better than other products, or that JAWS will be successful in
establishing the JAWS' brand image. Additionally, JAWS' management team has no
experience manufacturing or marketing software on a large scale. JAWS'
management's lack of experience could result in the failure of JAWS' ability to
sell its software.
POSSIBLE VOLATILITY OF JAWS' STOCK PRICE
Stock markets are subject to significant price fluctuations which may be
unrelated to the operating performance of particular companies and the market
price of JAWS' common stock may frequently change. The market price of JAWS'
common stock could continue to fluctuate substantially due to a variety of
factors, including: quarterly fluctuations in results of operations, JAWS'
ability to meet analysts' expectations, adverse circumstances affecting the
introduction of market acceptance of new products and services offered by JAWS',
announcements of new products and services by competitors, changes in the
information technology environment, changes in earnings estimates by analysts,
changes in accounting principles, sales of JAWS' common shares by existing
holders, loss of key personnel, and other factors.
NO DIVIDENDS ANTICIPATED ON JAWS' COMMON STOCK
JAWS does not anticipate generating cash flows from its operations in the
near future. If JAWS does generate cash flows from operations, JAWS intends to
use those positive cash flows to finance further growth of its business and does
not anticipate paying dividends to JAWS' shareholders. Accordingly, investors
should not purchase the shares with the investment objective of receiving
dividend revenue.
AUTHORIZATION OF PREFERRED STOCK AND POSSIBLE ANTI-TAKEOVER EFFECTS
JAWS' board of directors is authorized to create and issue shares of
preferred stock without the approval of JAWS' shareholders. Any preferred stock
that the JAWS' board of directors creates and issues could negatively affect the
voting power or other rights of JAWS'' common stock holders. Also, the JAWS'
board of directors may create preferred stock, which could be used to prevent a
third party from taking control of JAWS. Although JAWS does not plan to issue
any shares of preferred stock, it may choose to do so in the future. See the
section of this prospectus entitled "Description of Securities - Preferred
Stock."
RISKS ASSOCIATED WITH EXPENSES INCURRED TO PROTECT DIRECTORS AND OFFICERS FROM
LIABILITY
JAWS' articles of incorporation allow it to reimburse JAWS' officers and
directors for damages they may be subject to, that result from a breach of their
fiduciary duties to JAWS' shareholders. JAWS' articles of incorporation also
require us to advance money to any officer or director if the law does not
prevent it from doing so. JAWS may experience significant cash flow problems if
JAWS is required to either reimburse, or advance money to, JAWS' Officers or
Directors for such purposes. See "Management - Indemnification of Directors and
Officers."
USE OF PROCEEDSUSE OF PROCEEDS
There are no proceeds to be raised from this offering.
MARKET PRICE AND DIVIDENDS OF JAWS' COMMON
EQUITY AND OTHER STOCKHOLDER MATTERSMARKET
PRICE AND DIVIDENDS OF JAWS'S COMMON
EQUITY AND OTHER STOCKHOLDER MATTERS
<TABLE>
<CAPTION>
As of August 5, 1999, there were approximately 83 shareholders of record of
JAWS' common stock. JAWS' common stock is currently listed for trading on the
over-the-counter bulletin board under the symbol "JAWZ." The following table
sets forth, the high and low bid prices for JAWS' common stock as reported by
the OTC Bulletin Board since February 1, 1998.
PRICE RANGE TRADING VOLUME
----------- --------------
HIGH LOW
----------- --------------
<S> <C> <C> <C>
February 1998. . 1.00 0.59 333,800
March 1998 . . . 1.06 0.88 693,200
April 1998 . . . 1.22 0.94 2,480,000
May 1998 . . . . 0.88 0.75 869,700
June 1998. . . . 0.85 0.55 1,740,000
July 1998. . . . 0.75 0.45 2,621,500
August 1998. . . 0.76 0.40 2,282,900
September 1998 . 0.45 0.28 1,608,800
October 1998 . . 0.33 0.16 4,070,500
November 1998. . 0.26 0.15 3,905,100
December 1998. . 0.52 0.35 8,489,200
January 1999 . . 0.68 0.40 3,836,000
February 1999. . 1.12 0.55 5,862,100
March 1999 . . . 0.88 0.65 4,224,800
April 1999 . . . 0.98 0.62 4,293,700
May 1999 . . . . 3.53 0.71 15,160,300
June 1999. . . . 3.12 2.12 4,731,000
July 1999. . . . 2.78 1.88 2,841,700
August 1-4, 1999 2.19 2.02 148,500
</TABLE>
DIVIDEND POLICYDIVIDEND POLICY
JAWS' board of directors has complete control over whether or not it pays
dividends to JAWS' shareholders. JAWS has not paid, and does not believe it
will pay, any dividends on JAWS' common stock in the near future. JAWS intends
to invest future earnings, if any, in developing and expanding JAWS' business.
CAPITALIZATIONCAPITALIZATION
<TABLE>
<CAPTION>
The following table describes JAWS' actual capitalization as of March 31, 1999 and JAWS'
capitalization, as adjusted, to show the issuance of JAWS' common stock covered by this
Prospectus:
<PAGE>
MARCH 31, 1999
----------------
(unaudited)
AS ADJUSTED(2)
ACTUAL(1)
<S> <C> <C>
LONG-TERM DEBT. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 673,476 $4,804,802
STOCKHOLDERS' EQUITY:
Preferred Stock, $.001 par value, 5,000,000 shares authorized and
none issued and outstanding.. . . . . . . . . . . . . . . . . . . $ 0 $ 0
Common Stock, $.001 par value, 95,000,000 shares authorized and
10,929,505 issued (actual), 28,788,277 shares (as adjusted) (2).. $ 10,929 $ 16,102
Foreign Currency Translation Adjustment. . . . . . . . . . . . . . $ 20,922 $ 20,922
Deficit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,415,126 $6,388,051
Additional Paid-In Capital(2). . . . . . . . . . . . . . . . . . . $3,149,470 $8,317,696
LONG TERM CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . $ (602,182) $6,729,618
</TABLE>
__________________
(1) As of August 4, 1999, there were 13,061,949 shares of JAWS' common stock
outstanding.
(2) Adjusted to give effect to (i) issuance of the remainder of the
$5,000,000 convertible debentures, (ii) conversion of the convertible debentures
and (iii) exercise of warrants listed for registration in this document.
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATASELECTED FINANCIAL DATA
FOR THE THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED) FOR THE YEAR ENDED DECEMBER 31,
1997
---------------------------
1999 1998
--------------------------- ---------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Revenues. . . . . . . . . . . . . . . $ 3,047 $ 0
Total Costs and Expenses. . . . . . . $ 1,205,032 $ 1,032,658
Net Loss. . . . . . . . . . . . . . . $ 1,201,985 $ 1,032,658
Weighted Average Shares Outstanding . $ 10,670,321 $ 5,121,111
Net Loss Per Common Share Outstanding $ (0.11) $ (0.20)
FROM JANUARY 27, 1987 TO DECEMBER 31,
1998
---------------------------------------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
Revenues. . . . . . . . . . . . . . . $ 29,068 $ 0
Total Costs and Expenses. . . . . . . $ 3,105,355 $ 136,854
Net Loss. . . . . . . . . . . . . . . $ 3,076,287 $ 136,854
Weighted Average Shares Outstanding . $ 7,405,421 $4,000,000
Net Loss Per Common Share Outstanding $ (0.42) $ (0.03)
</TABLE>
<TABLE>
<CAPTION>
AS OF AS OF
------ ------
MARCH 31, 1999 ADJUSTED AS OF MARCH 31, 1999(1) DECEMBER 31, 1998
---------------- ----------------------------------- -----------------
AS OF DECEMBER 31, 1997
- ---------------------------
(UNAUDITED)
------------
BALANCE SHEET DATA:
<S> <C> <C> <C> <C>
$ 7,531,610
Current Assets. . . . . . . . . . $ 199,810 $ 194,549 $ 7,611
Working Capital (deficiency). . . $ (909,287) $6,422,513 $(431,166) $ (25,365)
Total Assets. . . . . . . . . . . $ 506,915 $7,838,715 $ 273,379 $ 9,931
Total Liabilities . . . . . . . . $ 1,782,573 $5,913,899 $ 847,038 $ 111,135
Stockholders' Equity (deficiency) $(1,275,649) $1,924,825 $(573,659) $(101,204)
</TABLE>
___________________________
(1) Adjusted to give effect to (i) issuance of $5,000,000 convertible
debentures, (ii) conversion of the convertible debentures and (iii) exercise of
warrants listed for registration in this document.
MANAGEMENT'S DISCUSSION AND PLAN OF OPERATIONMANAGEMENT'S DISCUSSION AND PLAN OF
OPERATION
OVERVIEW
JAWS develops software using encryption algorithms to secure binary data in
various forms. JAWS has been primarily engaged in recruiting personnel,
establishing corporate headquarters, and developing software and licensing
software from external developers for integration into JAWS proprietary
software.
JAWS' internal product development costs, incurred prior to establishing
technological feasibility, are expensed in accordance with the Financial
Accounting Standards Board Statement of Financial Accounting Standards ("SFAS")
No. 86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed." In accordance with SFAS No. 86, JAWS capitalizes product
development costs, subsequent to establishing technological feasibility, and
amortizes previously capitalized product development costs by using: (i) the
revenue curve method; or (ii) the straight-line method over the estimated
economic life of the product, which typically ranges from six months to two
years.
JAWS has experienced significant losses since its inception from overhead
and other costs incurred in the development and growth of JAWS. JAWS continues
to incur substantial up-front expenditures and operating costs in connection
with the expansion of its growth and marketing efforts. These costs may result
in significant losses for the foreseeable future. There can be no assurance
that JAWS will be able to successfully implement its growth and business
strategies, that revenues will continue to increase in the future, or that JAWS
will be able to achieve or sustain profitable operations.
COMPARATIVE AMOUNTS
JAWS was incorporated on January 27, 1997, but did not commence operations
until October, 1997. Accordingly, the following discussion and analysis
compares the financial position of JAWS as at December 31, 1998, after 12 months
of operations, with that as at December 31, 1997 after 11 months of existence
but only 3 months of operations. Further discussion will include a comparison
of the first quarter results ending March 31, 1999, with 4th quarter results
ending December 31, 1998 and 1st quarter results ending March 31, 1998.
PLAN OF OPERATION
Management of JAWS has planned its 12 month budget around the amended
Debenture Agreement with Thomson Kernaghan. The JAWS' budget has been designed
to work within this capital allotment and should fulfill the growing needs of
JAWS. It is also within the budget plan for JAWS to reduce its dependency on the
financing by Thomson Kernaghan. Management plans to control growth in this
period and remain within the total financing formula. JAWS believes it will not
need any further financing during this period. However, management of JAWS
continues to search for alternative forms of financing to be prepared in the
event Thomson Kernaghan fails to meet their financing obligations.
Through its marketing and direct sales efforts and by developing strategic
alliances and a strong VAR program, typical of the software industry, JAWS plans
to supplement cash flow requirements. The capital proposed in this registration
statement will be used to meet JAWS' business objectives.
JAWS continues to expend resources in researching and developing
complimentary technology for JAWS' current L5 products. JAWS anticipates that
it will have enough financing to continue funding research and development for
the next 12 months.
JAWS is experiencing rapid growth and consequently, the number of employees
has grown to approximately 40 and is expected to reach 80 in the next year.
JAWS' equipment costs have increased in relation to the increase in the number
of employees. To accommodate this growth, JAWS has moved to a larger facility
and has incurred significant expenses related to relocating JAWS' corporate
office. The expansion of JAWS' staff and facilities was planned and accounted
for in JAWS' 12 month business plan.
RESULTS OF OPERATIONS
The following discussion is for the year ended December 31, 1998, compared
to fiscal period ended December 31, 1997, and is also a comparison of the first
quarter results ending March 31, 1999, with 4th quarter results ending December
31, 1998, and the first quarter results ending March 31, 1998.
JAWS did not earn any revenues during 1997 since it was in the initial
stages of development. Revenues earned during the year ended December 31, 1998
were $29,068. Revenue in the 1st quarter of 1999, was $3,047. Although
substantial sales and marketing efforts were undertaken during this period,
sales contracts are not booked as revenue until actually realized. JAWS believes
that sales for the next period will positively reflect these efforts. There was
no sales revenue in the 1st quarter of 1998.
Expenses in all categories have increased significantly as a result of
establishing operations and moving JAWS products toward and into the
commercialization stage. These include expenses related to the preparation of
various marketing and sales documents and materials, wages and benefits,
requirements for office space, supplies, and other office related expenses. For
example, JAWS spent $218,574 on advertising and promotion in 1998 as compared
with $30,731 in 1997. In the 1st quarter of 1999, JAWS spent $149,248 on
advertising and promotion as compared with $5,193 in the 1st quarter of 1998. In
the last quarter of 1998, JAWS spent $23,810 on advertising and promotion.
Expenditures on rent and wages and employee benefits also reflect growth of
operations; in 1998 JAWS spent $29,637 on rent, in 1997 no rent was paid. In
the 1st quarter of 1999, JAWS spent $40,327 on rent as compared with $16,114 in
the 4th quarter of 1998 and $2,799 in the 1st quarter on 1998. In 1998, JAWS
spent $283,728 on wages and employee benefits as compared with $0 in 1997. In
the 1st quarter of 1999, JAWS spent $163,532 on wages and employee benefits as
compared with $159,129 in the 4th quarter of 1998 and $3,143 in the 1st quarter
of 1998. All of these increases relate to the growth of the business,
operations and administration of JAWS.
The significant increase in consulting expenses reflects JAWS' decision to
obtain various marketing, promotion, financial and general business assistance
and expertise on a contract basis for the immediate term. In 1998, JAWS spent
$514,894 on consulting fees. In 1997, $30,731 was spent on consulting fees.
JAWS anticipates that all JAWS' operating, and general and administrative
expenses will continue to rise as JAWS' operations grows and the markets for its
products and sales opportunities expand.
The loss from operations includes a one-time write-off of JAWS' acquired
software development costs. JAWS' policy of expensing software development
costs, as incurred, until technological feasibility has been established, is
consistent with generally accepted accounting principles; however, the write-off
in the year ending 1998, of $909,003, was a non cash item and therefore did not
result in any cash flow hardship for JAWS.
JAWS believes that expenses will continue to increase and revenues for the
next period will not be sufficient to support growing expenses. JAWS will
continue to require equity investment for the next period to support these
expenses, with the gap between revenue and expenses lessening slightly as sales
revenues are accounted for.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operations for the year ended December 31, 1998, was
$1,126,975 and $110,798 for the fiscal period ended December 31, 1997. These
increases are a result of the increased expenses incurred as noted above. JAWS
working capital deficiency of $909,287, as at March 31, 1999, has increased the
deficiency from $431,166, as at December 31, 1998, and $25,365 at December 31,
1997. Management believes the negative working capital position must be
addressed in the next period and is working toward arranging the appropriate
equity investments to maintain reasonable levels of working capital.
Cash on hand of $50,428, at March 31, 1999, is an increase from $33,732 at
December 31, 1998, and an increase from $111 at December 31, 1997, as a result
of a series of stock issuances and funds advanced under the Debenture Agreement.
A net amount of $498,442 was raised from financing during the three month period
January 1, 1999 to March 31, 1999 and these funds were deployed primarily to
fund working capital. In 1998, $1,274,800 was raised as a result of issuing
equity (compared to only $35,650 during 1997). In addition, JAWS repaid
stockholder loans of $62,591 between January 1, 1999 and March 31, 1999,and
acquired approximately $234,390 of fixed assets as part of building the
necessary infrastructure and systems it needs to support the additional staff
hired during the period. During 1998, JAWS repaid stockholder loans in the
amount of $78,159 and acquired approximately $96,502 of fixed assets as part of
the operation of JAWS. These increases are consistent with JAWS's increase in
business, operations and administration. Management estimates that for each new
position created in the Company, approximately $7,200 will be expended in
infrastructure costs (i.e. furniture, software licensing, technology and
general office and stationery requirements).
Prepaid expenses, consisting of premises deposits and legal fee retainers,
were $113,936 at March 31, 1999. Prepaid expenses, consisting of premises
deposits and legal fee retainers increased from $7,500 at December 31, 1997, to
$140,456 at December 31, 1998.
Accounts payable have increased dramatically from $379,720 in December 31,
1998 to $726,559 in March 31, 1999. These increases are a result of the efforts
of management to increase sales revenue and grow JAWS' operations and are
consistent with the other expense increases in 1998. Accounts payable increased
from $32,976 at December 31, 1997, to $379,720 at December 31, 1998. Accrued
liabilities have also grown from $0 at December 31, 1997, to $48,880 at December
31, 1998, and $180,234 at March 31, 1999. JAWS has anticipated and budgeted for
these increases to provide for the organizations shift from research and
development to commercialization. Management also believes this trend will
continue until cash flow from sales are realized allowing JAWS to reduce the
trade accounts in a more timely fashion.
JAWS has not established any lines of credit outside of trade accounts and
will not be in a position to negotiate any lines of credit until sales contracts
have been validated and matured. JAWS has not used any debt instruments to date
due to its early stage of operations.
FLUCTUATIONS IN OPERATING RESULTS
JAWS' quarterly operating results have fluctuated significantly in the past
and will likely continue to fluctuate significantly in the future depending on a
variety of factors, several of which are not in JAWS' control. Such factors
include: the demand for JAWS' products and the products of its competitors,
development and promotional expenses related to the introduction of products or
enhancements, the degree of market acceptance for JAWS' products and
enhancements, the timing of orders from significant customers, delays in
shipment, the level of price competition, changes in computing platforms, the
nature and magnitude of product returns, order cancellations, software defects
and other quality problems, the length of product life cycles, the percentage of
JAWS' sales related to international sales and changes in personnel. Based on
the foregoing, JAWS believes that period to period comparisons of operating
results should not be relied upon as indicative of future results.
FINANCING
JAWS entered into the Debenture Agreement on September 25, 1998 with
Thomson Kernaghan & Co. Ltd. This agreement allowed Thomson Kernaghan to
purchase from JAWS up to two million dollars ($2,000,000) of a 10% convertible
debenture and 1,428,572 warrants to purchase 1,428,572 common shares at $0.28
per common share. On April 27, 1999, JAWS amended the Debenture Agreement in
order to increase the purchasable amount of the underlying debentures to five
million dollars ( US $5,000,000) and in order to set a fixed price for the share
conversion provisions of the debentures.
As of the date of this prospectus, $1,520,000 of the $5,000,000 available
under the Debenture Agreement has been advanced. Of this amount, $210,000 plus
interest in the amount of $3,798, has been noticed for conversion at $0.1118 per
common share and will result in the issuance of 1,912,317 common shares. Of the
remaining balance, $210,000 may be converted at a fixed price of $0.28 per
common share, $250,000 may be converted at a fixed price of $0.28 per common
share, $250,000 may converted at a fixed price of $0.40 per common share and
$600,000 may be converted at a fixed price of $0.65 per common share.
The balance of the financing, $3,480,000 may, at the option of JAWS, be
taken down within a reasonable period from the date of effectiveness of the
registration statement with a fixed minimum conversion price of $0.40 per common
share. In each instance, JAWS need not call the financing if it does not deem
market conditions favorable, or alternatively, the parties may, upon the mutual
consent of JAWS and Thomson Kernaghan, renegotiate for a higher conversion
price.
In connection with the amended Debenture Agreement, Thomson Kernaghan
received warrants to purchase 923,077 common shares at $0.65 per share, which
may result in the issuance of 923,077 common shares. There will be a finance
fee of 10% of the amount funded through the purchase of debentures, up to
$2,000,000, and 8% of the proceeds funded in excess of $2,000,000. The finance
fee may be paid in cash or funded on a combination of cash and unregistered
common stock. At the option of JAWS, 37.5% of the finance fee may be paid by
the issuance of the unregistered common stock.
The Thomson Kernaghan warrants were negotiated to be 20% of the first
$2,000,000,which resulted in the issuance of 1,428,572 warrants exercisable at
$0.28 per common share and 20% of the additional $3,000,000 for the issuance of
923,077 warrants exercisable at $0.65 per common share.
In connection with the Debenture Agreement, JAWS has undertaken to
register, pursuant to a Form SB-2 registration statement, one hundred percent
(100%) of the common shares underlying the debentures and the warrants.
Thomson Kernaghan is acquiring the debentures under the amended Debenture
Agreement in a transaction that is exempt from registration requirements under
Regulation S. Thomson Kernaghan is a purchaser who is not defined as US
persons, as defined by Rule 902 (o) of Regulation S.
YEAR 2000 COMPUTER ISSUES
JAWS, as well as its customers and suppliers and the financial
institu-tions and governmental entities with which it deals, utilize information
systems that will be affected by the date change to the year 2000. Many of
these systems, if not modified or replaced, will be unable to properly recognize
and process date-sensitive information before, on and after January 1, 2000.
STATE OF READINESS
In July, 1998, JAWS organized a year 2000 project team to assess the impact
of the year 2000 issue on its operations, develop plans to address the issue and
implement compliance. The project team developed a company-wide, year 2000
remediation plan which consists of a ten-step process to examine JAWS' own
system and those which JAWS estimated may adversely affect JAWS' systems: (1)
in-house computer equipment; (2) outside supported network equipment; (3)
bandwidth providers; (4) in-house software; (5) outside supported network
software; (6) contractors; (7) in-house auxiliary equipment; (8) physical plant;
(9) suppliers; and (10) liability.
For each of the above-listed systems, JAWS' approach toward becoming year
2000 compliant has been as follows:
(1) In-house computer equipment:
Since inception, the company has insisted that all new equipment purchased be
certified to be year 2000 compliant. JAWS has not dealt with legacy equipment
for internal use and will only purchase computer equipment produced by year 2000
compliant manufacturers.
(2) Outside supported network equipment:
JAWS has limited its outside resource affiliations to one company.
FutureLink Distribution Corporation maintains JAWS' network system. JAWS has
requested a full report from this company relative to their compliance.
(3) Bandwidth providers:
JAWS has limited its bandwidth provider to FutureLink Distribution
Corporation.
(4) In-house software:
JAWS' own products have been carefully scrutinized for compliance. JAWS
believes that all in-house software products developed by JAWS meet are year
2000 compliant.
(5) Outside support network software:
JAWS relies on FutureLink Distribution Corporation for all outside software
needs with the strict mandate to only supply year 2000 compliant support
software. A full report has been requested from FutureLink.
(6) Contractors:
No contractors have been engaged to perform programming work. Due to the
nature of JAWS' product line, strict controls are followed to ensure no outside
contractors have access to JAWS' systems, designs and programming.
(7) In-house auxiliary equipment:
All auxiliary equipment used and owned by JAWS is less than 12 months old,
including phone systems, printers and photocopiers. JAWS has requested year
2000 compliance certificates from each manufacturer.
(8) Physical plant:
JAWS currently leases office space in the downtown core of Calgary,
Alberta. A notice requesting year 2000 compliance has been delivered to the
landlord.
(9) Suppliers:
All critical stock items will be in stock prior to the beginning for the
year 2000 thus eliminating inventory pressure for the first quarter of 2000.
(10) Liability:
JAWS has received definitive answers from all insurance carriers with the common
consensus that no liability is covered under JAWS' current policies. JAWS
believes that it has reduced its risk to levels such that they do not warrant
additional or special insurance at this time.
ESTIMATED COST OF REMEDIATION
JAWS currently estimates total year 2000 expenditures at approximately
$25,000 of which approximately $5,000 has been expended as of September 30,
1998, to make the required year 2000 modifications and replacements to its own
systems. All modification and maintenance costs, including costs to replace
embedded technology that does not significantly extend the life or improve the
performance of the related asset are expensed as incurred. Costs to purchase
new hardware and software and to replace embedded technology that does
significantly extend the life or improve the performance of the related asset
are capitalized and depreciated over the assets' useful lives. All of these
costs are being funded through internal cash flow. The estimated total
remediation cost does not include any expenditures that may be incurred in
connection with the implementation of the contingency plans, discussed below.
MOST REASONABLY LIKELY WORST-CASE SCENARIO
JAWS currently believes that it will be able to modify or replace its own
affected systems in a timely fashion and minimize detrimental effects on its
operations; however, JAWS' ability is subject to timely assistance by the
vendors of certain process-control systems. JAWS has received written assurances
from some, but not all, third parties with respect to their own systems year
2000 issues and is not in a position to reliably predict whether third parties
will experience remediation problems. If JAWS or major third parties fail to
successfully address the year 2000 issue, there could be a material adverse
impact on the business and results of operations of JAWS.
JAWS has not determined the most reasonable worst-case scenario that could
result from any failure by JAWS or third parties to resolve the year 2000 issue.
JAWS will consider this matter in connection with its development of contingency
plans, discussed below. However, such a scenario could include a temporary
curtailment or cessation of operations at JAWS' facilities, and a resulting loss
of production, safety and environmental exposure and a temporary inability on
the part of JAWS to process orders and deliver finished software products to
customers on a timely basis are also concerns relating to a worst case scenario.
CONTINGENCY PLANS
JAWS' year 2000 efforts have been devoted primarily to the readiness
program described above. JAWS has not yet developed contingency plans to
address and mitigate the potential risks associated with the most reasonable
worst-case scenario. JAWS' year 2000 program is an ongoing process of
evaluation and planning. Estimates of remediation costs, completion dates as
well as projections of the possible effects of any non-compliance, are subject
to change.
JAWS has not conducted a systematic evaluation of the year 2000 compliance
of its vendors and customers. As a result, it is possible that JAWS' future
performance may be adversely impacted by payment and financial difficulties
experienced by customers, and/or by shipping fulfillment and accounting
difficulties experienced by vendors. JAWS believes that it has sufficient
resources, including cash reserves and inventory supplies, to maintain
operations during delays in payments or supplies of inventories. JAWS is aware
that extended difficulties by larger vendors may have a significant impact;
however, it is unable at this time to anticipate the extent of any such impact
were it to occur.
RECENT ACCOUNTING PRONOUNCEMENTS
In February, 1998, the FASB issued SFAS No. 132, "Employers Disclosures
about Pensions and other Post Retirement Benefits." JAWS does not have any such
plans for its employees.
In June 1998, the FASB issued Statement #133, "Accounting for Derivative
Instruments and Hedging Activities." JAWS does not acquire derivatives or engage
in hedging activities.
BUSINESSBUSINESS
JAWS was incorporated as a Nevada corporation on January 27, 1997 under the
name E-Biz Solutions Inc. On March 27, 1998, E-Biz Solutions Inc. changed its
name to JAWS Technologies, Inc. JAWS owns 100% of the issued and outstanding
capital stock of JAWS Technologies, Inc. a corporation formed under the laws
of the Province of Alberta, Canada (together, throughout this prospectus,
referred to as "JAWS"). JAWS has offices in Alberta, Canada where it develops
encryption proprietary software using encryption algorithms that secure binary
data in various forms, including streamlining or block based data.
The programming of JAWS' software has been in development for approximately
15 years. The result of these efforts is an easy to use means of implementing a
public key infrastructure ("PKI"), a "strong encryption" tool, to protect
sensitive information. The term "strong encryption" is used to describe codes
that are nearly impossible to break. Currently JAWS' software technology is
capable of encrypting to a bit level of 4,096. JAWS' software operates under
Windows 95, Windows 98, Windows NT, and Windows CE. Other platforms are
currently under development.
A sales and marketing team for the L5 Data Encryption software has been
working since May 1998 to organize collateral sales materials (boxes, CD cases,
stationary, brochures). The creation of the JAWS brand identity, as well as
establishing relationships with public relations companies to provide market
awareness and industry interest in JAWS product, has been the focus of the sales
and marketing team. Presently the focus of the sales and marketing team is the
development of value added reseller ("VAR") agreements and original software
manufacturers ("OSM") channels.
Although there has been much interest in L5, there has not been significant
sales of the product. JAWS believes there are a number of factors affecting the
sales of L5: first, many systems managers are postponing significant security
purchases due to the Y2K issue. This barrier will be removed by January 1,
2000. Second, many potential purchasers are aware of security as an issue and
are educating themselves as to what products and services are available and
identifying their needs. Third, the selling cycle for security software through
reseller and VAR programs takes considerable time to conclude.
In December of 1998, JAWS entered into two agreements with ISP's that provide
product for the ISP's to both implement for their own use and products as well
as to market the L5 and JAWS e-mail encryption product ("XMail") to their users.
Both agreements provide for royalties to be paid to JAWS based on the numbers of
their users who download JAWS' products.
XMail works with all major email applications (e.g. Netscape Communicator,
Microsoft Outlook, Microsoft Outlook Express, Eudora, Pegasus). It allows users
to encrypt an e-mail message from the point of sending and to keep it secure
until the recipient downloads their email and is prompted to decrypt the
message. In order to read the encrypted message, the recipient can download the
decrypt only version from the JAWS website. Also, the complete JAWS' e-mail
product can be downloaded from JAWS website so there is minimal need for
production of software disks, manuals and packaging. JAWS is currently working
on Lotus Notes and Microsoft Exchange versions of XMail and anticipates release
by the end of the 3rd quarter, 1999.
JAWS manufactures and produces all software products in JAWS corporate office in
Calgary, Canada. On-line help and manuals may also be downloaded from JAWS'
website.
JAWS has also completed a beta release of L5 e-mail encryption software for
Microsoft Outlook usersThe product enables users to protect e-mail and
attachments with a minimum amount of effort required by sender/receiver. JAWS
has also completed the development of L5 Data Encryption PDA Software for Palm
III(TM) connected organizers. This software provides encryption capabilities
securing sensitive information stored in memos on Palm III(TM) organizers. This
is the only Palm Platinum certified security related software available to Palm
users.
JAWS has commenced the provision of information systems security consulting
through its Information Systems Security Group ("ISS"). ISS provides network
security assessment/audits to corporate clients with LAN/WAN/intranet/internet
systems in order to assess risk of compromise and access to sensitive
information. ISS has completed several contracts and has several proposals for
additional contracts outstanding. This service can create recurring revenue
through yearly audits and reassessments. Further, as systems change, evolve and
become obsolete, ISS performs further reassessments as required.
Numerous markets exist for the JAWS' software. The management of JAWS
believes that VARs are a significant potential market for JAWS' products. Such
external software developers can use the JAWS' software as a utility embedded in
their products to augment or enhance their particular product offerings.
Accounting software programs, database developments, e-mail programs and
communication software are all potential channels for JAWS' software.
Additional potential customers include the Smart Card industry, hand-held
computing devices, telecommunications and access control devices. JAWS products
are implemented as a software utility to provide security enhancements to
existing product offerings by other manufacturers. Direct sales channels
include product offerings to ISPs, data warehouses, corporate networks and
personal computer users.
SERVICES
JAWS' efforts to remain competitive in the marketplace include providing
customers with professional services such as security audit practices, security
business plan development (including security policy development),
implementation practices and re-audit or validation processes. JAWS has
developed its services around the premise of full information security
solutions. This means professional services followed by strong product
offerings to maintain the best possible solution for the given client. JAWS
believes that the marketplace is not geographically restricted, size restricted,
or sector specific. JAWS' professional services can be offered to government
agencies, military agencies, small corporations, large corporations, financial
institutions, industrial clientele and foreign entities.
JAWS' security audit technology is sold to customers and used by customers
so that they may understand the full magnitude and risks inherent with their
current systems information technology ("IT"). This is achieved through a
number of practices including intrusion testing, penetration testing, site
mapping and systems testing with specialized software. Once JAWS fully
understands the risk revealed in the audit, its customer-specific business plan
for IT securities can be developed. At the option of the client, JAWS can then
integrate the appropriate software and products to meet customer needs. The
cost analysis associated with such implementation and products is a critical
planning path. This ensures that the customer meets its objectives, and
provides policy guideline development to ensure that JAWS, and the customer,
understand the necessary uses of security. The business plan generally includes
a cost analysis to ensure the customer understands the true cost of security in
relationship to its risk, a critical path schedule to ensure the customer meets
its objectives and policy guidelines development to ensure employees of JAWS
fully understand the security elements. Finally, JAWS provides training for the
customers' staff to ensure that its employees adopt the corporate culture
established by the business plan.
JAWS also offers re-auditing practices to assist the customer in
maintaining its security policies. The re-audit is much like a report card for
the customer to ensure that it is maintaining the policies and procedures
underlying the JAWS software.
The systems security group of JAWS believes that in order to provide
satisfactory solutions for its customers, product offerings must include those
of competitors, and in most cases, suppliers of security software, hardware and
firmware. This is achieved through standard licensing contracts with other
security product vendors such as Network Associates, and providers of intrusion
detection products, and other security products.
INFORMATION SECURITY MARKETPLACE
JAWS believes that the marketplace for encryption software is virtually
unrestricted by size and geography. With the ongoing drive of the computer
industry toward open computing, enormous security risks have been revealed.
Corporations, government, institutions and foreign entities are all faced with
security questions, and as these organizations grow, their network security will
constantly be faced with new challenges. The information industry in the last
ten years has changed from information gathering and information ware-housing,
to information sharing. Such information sharing is growing exponentially, with
security being the first component of any solid information system, whether it
is internal or external. More and more, corporations are finding that their
information is their asset and such proprietary information whether it is market
intelligence, corporate planning, corporate development, or client information,
must at all costs remain secure within the organization while at the same time,
be available to strategic partners, employees and management. The only way to
ensure maximum use of all information gathered and deployed is through security.
According to San Jose, CA, based Data Quest, IT services now make up 37.5%
of all IT spending. Computer sales represent 28.8%, software 14.3% and
telecommunication equipment 9.3%. Approximately $262 billion were spent on IT
services in 1996 and it is anticipated that users will spend approximately $413
billion in the year 2000. A portion of this enormous IT budget for the year
2000 will include a significant amount towards system security.
COMPETITION
Products
A number of companies have developed various security products ranging from
encryption software to firewalls to intrusion detection software or hardware
solutions. No one particular product in the marketplace controls market share.
Two distinctive competitors, RSA and Pretty Good Privacy (Network Associates)
have led in the sale of encryption software. JAWS believes that this lead is a
result of being first to the marketplace and commercializing a product specific
to individual users rather than government agencies. With only two strong
competitors in the marketplace, JAWS believes that there is room for additional
products, specifically those products that provide stronger, faster, and easier
to use solutions for the consumer.
An added enhancement of the opportunity for new players in the marketplace
is the typical customer's unwillingness to turn over all security to a specific
product or corpora-tion. JAWS engages in market study and competitive study
research to ensure that JAWS remains aware of other competing product
development. Although other products have entered the marketplace, due to the
size of the market, plus the constantly changing atmosphere, JAWS believes it
can penetrate the market with its products. JAWS also believes that healthy
competition has aided in the development of the marketplace through customer
awareness that information security is critical.
Services
Information auditing services, security business planning, implementation,
and security management are relatively new industries, as such, very few large
size competitors exist and only small firms are providing the services at this
time. The growth is anticipated to be exponential over the next number of
years. JAWS is positioning itself to be one of the dominant market players in
these areas of professional services. It will achieve this through both
internal growth, and external growth through acquisitions. JAWS is aggressively
pursuing a number of the small operators in this field in order to maintain its
high sales expectations.
BUSINESS STRATEGY
The blend of both product and services offered by JAWS is its strategy for
ensuring that it is well positioned in the customer's mind as being the number
one source for information security solutions. JAWS has developed specific
business processes and marketing strategies that will ensure that it meets and
exceeds the market expectations. Reaching the marketplace is achieved through
conventional marketing tactics but also through educational processes, such as
seminar delivery through accounting and legal firms to their client base, value
added reselling programs and a strong channel marketing strategy. JAWS believes
it can grow its practices, deliver services and products in a cost-effective
manner, but yet be able to handle superior volumes through exceptional business
processes developed by JAWS.
Customer support
JAWS provides a high degree of initial and continuing customer service, and
support at a level JAWS believes generally exceeds industry standards. JAWS
believes that its focus on customer service will be a key factor in its high
level of customer retention and growth in revenues. Support is available to the
customer through a help desk process and eventually regional technicians.
Technological change
Although JAWS is not aware of any pending or perspective technological
change that would adversely affect its business, new development in technology
could have material effect on the development or sale on some or all of JAWS'
services or could render its services not competitive or obsolete. There can be
no assurance that JAWS will be able to develop or acquire new or improved
services or systems, which may be required in order to remain competitive. JAWS
believes however, that technological change does not present a material risk to
JAWS' business but enhances its business opportunities. Each technological
change reveals new security issues which must be addressed by professional
services and results in new products.
Intellectual property matters
JAWS is in the process of applying for a U.S. patent. JAWS maintains
strict confidentiality practices with its employees including contractual
obligations by the employees. JAWS has not registered any of its trademarks,
trade names or service marks. JAWS owns the copyright in all the software
created by its employees and the copyrights which it has contractually acquired.
JAWS also believes that because of the rapid pace of technological change in the
computer industry, copyright and other forms of intellectual property protection
are of less significance within its services division. JAWS' business is not
dependent on a single license or group of licenses. JAWS is experienced in
handling confidential and sensitive client information that is intrinsic or
critical to a client's corporate culture.
ENVIRONMENTAL LAWS
JAWS endeavors to follow all recycling programs and maintains its awareness
of the changing environmental laws.
EMPLOYEES
As of August 6, 1999, JAWS employs approximately 40 full time staff. None
of JAWS' employees are represented by any type of labor organization and JAWS is
not aware of any activity by employees seeking organization. JAWS considers its
relationships with it employees to be satisfactory. JAWS has, in its early
stages, developed strong human resources practices with belief that the growth
of JAWS is completely reliant on its human resources and as such, pays great
detail and attention to human resource factors.
INSURANCE
JAWS maintains insurance coverage that management believes is reasonable,
including key man life insurance policies, business interruption insurance,
asset protection and public liability insurance. JAWS also maintains extensive
data backup procedures to protect both client and JAWS data.
DESCRIPTION OF PROPERTY
JAWS maintains its offices, and computer center, in a Calgary, Alberta,
Canada facility of approximately 10,000 square feet. In the past, JAWS has
purchased most of its equipment, and is now considering leasing all future
equipment. JAWS believes that its current and proposed facilities are in good
condition.
LEGAL PROCEEDINGS
JAWS is not a party to any litigation or pending litigation outside of
routine litigation incidental to the business of JAWS.
MANAGEMENTMANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table includes the names, positions and ages of the Executive
Officers and Directors of JAWS. Directors are elected at JAWS annual meeting of
shareholders and serve for one year or until their successors are elected. The
board elects the Officers and Officer's terms of office are, unless governed by
employment contract, at the discretion of the Board.
<TABLE>
<CAPTION>
NAME AGE POSITION HELD
- --------------------- --- -------------------------------------------------
<S> <C> <C>
Robert J. Kubbernus 39 Chairman of the Board and Chief Executive Officer
Riaz Mamdani. . . . 31 Chief Financial Officer
Tej Minhas. . . . . 39 President, Chief Operating Officer
Vera Gmitter. . . . 41 Vice President Operations
Cameron B. Chell . 30 Director
Julia L. Johnson. . 34 Director
Arthur Wong . . . . 30 Director
</TABLE>
ROBERT J. KUBBERNUS. Since joining JAWS in 1997 as CEO and Chairman, Mr.
Kubbernus's primary responsibilities have been to oversee JAWS' security product
developers, provide executive direction and develop key contacts within
government, corporations, investors, clients, insurance underwriters and the
investment community. From 1992 to 1997, Mr. Kubbernus held the position of
President and CEO at Bankton Financial Corporation. He headed up a team of
corporate financial consultants who specialize in the placement of debt
instruments with institutional and private lenders. Before 1992, he was the
Chief Financial Officer as well as the Chief Development Officer at Bankers
Capital Group, where he developed new products and markets as well as overseeing
the financial controls of the organization.
RIAZ MAMDANI. As Chief Financial Officer, Mr. Mamdani is responsible for
the development of operational financing including: security funds, the
documentation needed to close such funding, establishing and implementing
professional relationships on behalf of the company, and assisting in matters of
corporate compliance as well as company structure. Mr. Mamdani has been active
in the growth of JAWS from its inception. He has assisted with numerous
financings and all significant legal matters pertinent to JAWS. From May 1996
to August 1998, Mr. Mamdani was a Barrister and Solicitor with the Beaumont
Church, a Calgary-based law firm, where his practice focused in the areas of
Corporate, Commercial and Securities law. Since 1992, Mr. Mamdani has been
actively involved in a number of real estate developments in the Calgary area
where he has participated as both an investor and developer. Mr. Mamdani has a
Bachelor of Law degree from the University of Calgary. He also holds a Bachelor
of Sciences degree in Pharmacy.
TEJ MINHAS is a seasoned IT executive with extensive entrepreneurial and
corporate exposure. He has more than 20 years of experience in the IT industry
and has held a variety of senior positions. As an expert IT strategist, he has
helped foster the growth of the IT industry from keypunches and card readers to
the explosion of the Internet. His technology skills include most major
commercial hardware, software, operating system and network platforms. He has a
proven track record of adding value to organizations by providing creative
solutions, integrating products, services and alliance partners, to difficult
problems. Mr. Minhas has worked and has expertise in a number of industries
including: financial services, insurance, telecommunications, oil & gas,
retail, manufacturing, and agriculture and has previously held overall profit
and loss responsibility for multi-branch IT operations. Mr. Minhas holds a
Bachelor of Science, Computer Science Specialty, from the University of Toronto.
VERA GMITTER serves as Vice President of Operations. Ms. Gmitter is
responsible for day to day operations of JAWS including financing, government
regulation, policies and procedures. Ms. Gmitter has owned and operated
numerous businesses in the service and retail industries. Before joining JAWS,
Ms. Gmitter held the position of General Manager at Bankton Financial
Corporation. Through Continuing Education, she has helped women entrepreneurs
retraining to enter the workforce. She has also taught Junior Achievement, a
North America-wide business program aimed at educating Elementary school aged
children. Ms. Gmitter holds a Bachelor of Arts in Political Science and
Economics from the Augustana University.
CAMERON B. CHELL. Mr. Chell has several years of experience in developing
financing solutions for high-tech organizations. As a registered broker, he has
aided corporations through their initial financing and start-up phases. Mr.
Chell is also Chief Executive Officer and Chairman of FutureLink Distribution
Corp. In 1997, in partnership with Mr. Chris McNeill, an investor relations
specialist, Mr. Chell opened an investment banking firm, Chell McNeill Inc. The
firm was established to assist high-tech companies, like JAWS, FutureLink, and
others, in acquiring market and investor relations support. On November 6,
1998, Mr. Chell entered into a Settlement Agreement with the Alberta Stock
Exchange to resolve a pending investigation into alleged breaches by Mr. Chell
of Alberta Stock Exchange rules and bylaws. As part of the Settlement
Agreement, (i) Mr. Chell acknowledged that he had breached certain duties of
supervision, disclosure, or compliance in connection with various offers and
sales of securities, (ii) Mr. Chell was prohibited from receiving Alberta Stock
Exchange approval for a five-year period; and (iii) Mr. Chell has been fined
CDN$25,000 and a three-year period of enhanced supervision has been imposed.
JULIA L. JOHNSON is a nationally-recognized authority on utility regulation
in the U.S. She currently serves as Chairman of the Florida Public Service
Commission (the "Commission"), state Chair person of the Federal/State Joint
Board on Universal Service, Vice Chairman of the Communications Committee of the
National Association of Regulatory Utility Commissioners, and is a board member
for the Markle Foundation, a project that encourages the use of new
communications technologies for socially beneficial purposes. Before being
appointed to the Commission, Ms. Johnson served as the Director of Legislative
Affairs and senior land use attorney for the Department of Community Affairs.
She was the chief lobbyist representing the agency before the Florida
Legislature on land use issues. In 1997, Ms. Johnson received the Dollars &
$ense Magazine's Best and Brightest Business & Professional Men and Women award.
In 1996, she received the University of Florida Association of Black Alumni's
Outstanding Leadership Award. Ms. Johnson holds a Juris Doctorate, with a
concentration in corporate and real estate transactions, from the University of
Florida School of Law, as well as a Bachelor of Science in Business
Administration from the University of Florida.
ARTHUR WONG provides strategic direction to JAWS in the area of channel
development. In the past seven years Mr. Wong has founded one oil and gas
company and three technology companies. Mr. Wong has taken two of those
companies public. In his current role of Fellow for Network Associates Inc. of
Santa Clara, California, Mr. Wong heads up Active Security issues and spearheads
the adoption of new security infrastructures for global enterprises and
integrators. He also develops standards for new security infrastructures and
works on its integration and adaptation internationally. In 1996, Mr. Wong
founded and managed Secure Networks Inc., an organization that developed
Internet security tools and offered security consulting before it was acquired
by Network Associates Inc. for approximately $25 million. He is the Managing
Director and Founder of H2O Entertainment Corp., a Calgary-based organization
that develops products for Nintendo and its N64 game platform. Mr. Wong also
founded Millennium Systems Canada Inc., a wholesale distributor of high-end
computer equipment. Mr. Wong holds a Bachelor of Science in Communication from
the University of Calgary.
BOARD OF DIRECTORS AND COMMITTEES
The board of directors has nominated a Compensation Committee consisting of
two outside directors and one internal director. Any and all compensation plans
for the executive members are reviewed on an annual basis. JAWS has a stock
option plan that it uses to compensate executives as well as an incentive for
executive efforts to add value to JAWS.
The Compensation Committee currently consists of Julia L. Johnson, Arthur
Wong and Cameron B. Chell. The Compensation Committee establishes salaries,
incentives and other forms of compensation for officers of JAWS. The Audit
Committee consists of Julia L. Johnson, Arthur Wong and Cameron B. Chell.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
JAWS' Articles of Incorporation and By-Laws provide for indemnification of
JAWS' officers and directors, to the fullest extent permitted by Nevada Law. In
addition, the Restated Articles of Incorporation provide, pursuant to Nevada
Law, that no director shall be personally liable to JAWS, or its shareholders
for monetary damages, because of any breach of fiduciary duty by such director
as a director. However, the directors shall be liable to the extent provided by
applicable law for (i) breach of the director's duty of loyalty to JAWS or its
shareholders, or (ii) acts or missions not in good faith or which involve
intentional misconduct or willful violation of law.
At present, there is no pending litigation or proceeding involving a
director, officer, employee, or other agent of JAWS. Insofar as indemnification
for liability arising under the Securities Act may be permitted to directors,
officers, and controlling persons, JAWS is aware that, in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy, as expressed in the Securities Act, and is unenforceable.
EXECUTIVE COMPENSATION
The following table sets forth information concerning compensation of the
seven senior officers and directors of JAWS, for the fiscal year from January 1
to December 31, 1998.
ANNUAL COMPENSATION LONG-TERM COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ENDED SALARY($) BONUS($) OTHER
--------------------------- ---------- --------- -------- -----
ANNUAL COMPENSATION($) SECURITIES UNDERLYING OPTIONS GRANTED(#) ALL
- ------------------- ---------------------------------------- ---
OTHER COMPENSATION($)
---------------------
Per Year
CEO - Robert Kubbernus 1998 180,000U.S$ Nil Nil 350,000
CDN$135,000(1)
Director - Cameron Chell 1998 50,000U.S$ Nil Nil 250,000
CDN$47,986
Director - Julia Johnson 1998 60,000US$ Nil Nil 200,000
CDN$ 0
Director - Arthur Wong 1998 60,000 US$ Nil Nil 200,000
CDN$ 0
V.P. Operations - Vera Gmitter 1998 45,000CDN$ Nil Nil
82,500 CDN$ 0
President, Chief Operating Officer Tej Minhas 1998 80,000CDN$ Nil
Nil 88,000 CDN$ 0
CFO $160,000CDN per year, beginning Mar.1, 1999
Riaz Mamdani 350,000
- -----------------------
(1) See: "Certain Relationship and Related Transactions - Consulting Fees"
COMPENSATION OF BOARD OF DIRECTORS
Out of pocket expenses of JAWS directors, related to their attendance at
meetings of the board of directors, are paid by JAWS. JAWS may reimburse
expenses incurred by directors related to board of directors meetings. Each of
Ms. Johnson and Mr. Wong are to be compensated in 1998 for their directors'
services rendered to JAWS in an amount equal to US$60,000 (CDN$87,000) payable
in JAWS's sole discretion, in stock or in cash. In addition, the directors are
eligible to receive stock options under the JAWS 1998 Stock Option Plan. No
other payments have been made to the directors.
DIRECTORS' AGREEMENT
Each of Ms. Julia Johnson and Mr. Arthur Wong have entered into agreements
with JAWS pursuant to which they have agreed to act as a director of JAWS. In
consideration of such services, the agreement grants each of such directors a
fee of stock or cash equal to $60,000US per annum. In addition, these directors
have been granted options to purchase 200,000 shares of JAWS at a price per
common share equal to $0.48, exercisable until August 1, 2000.
PRINCIPAL SHAREHOLDERSPRINCIPAL SHAREHOLDERS
The following table describes certain information regarding certain
individuals who beneficially owned JAWS common stock on August 4, 1999. In
general, a person is considered a "beneficial owner" of a security if that
person has, or shares, the power to vote or direct the voting of such security,
or the power to dispose of such security. A person is also considered to be a
beneficial owner of any securities of which the person has the right to acquire
beneficial ownership within (60) days.
The individuals included in the following table are:
(1) people who JAWS knows beneficially own or exercise voting or
control over 5% or more of JAWS common stock,
(2) each of JAWS directors, and
(3) all JAWS executive officers and directors as a group.
At August 4, 1999, JAWS had 13,061,949 shares of common stock outstanding.
PERCENT OF CLASS(2)
--------------------------------------------
BEFORE OFFERING AFTER OFFERING
--------------------------------------------
NAME AND OFFICE OF BENEFICIAL OWNER(1) AMOUNT AND NATURE OF BENEFICIAL
OWNERSHIP(5)
- ------------------------------------- ----------------------------------------
Robert J. Kubbernus(4). . . . . . . . . . . . . . 953,667 7.3% 3.15%
Cameron B. Chell(5) . . . . . . . . . . . . . . . 283,333 2.17% 0.94%
Vera Gmitter(6) . . . . . . . . . . . . . . . . . 18,500 0.14% 0.06%
Julia Johnson(2). . . . . . . . . . . . . . . . . 200,000 1.53% 0.66%
Tej Minhas(7) . . . . . . . . . . . . . . . . . . 29,333 0.22% 0.10%
0.66%
Arthur Wong(3). . . . . . . . . . . . . . . . . . 200,000 1.53% 2.83%
Riaz Mamdani(8) . . . . . . . . . . . . . . . . . 856,000 6.55%
ALL DIRECTORS AND OFFICERS AS A GROUP (7 PERSONS) 2,540,833 18.44 8.04%
__________________
(1) Unless otherwise stated, the business address of each of the
stockholders named in the table is c/o JAWS at 1013-17th Avenue SW T2T 0A7,
Calgary, Alberta, Canada. Except as otherwise indicated and subject to
applicable community property and similar laws, JAWS assumes that each named
person has the sole voting and investment power with respect to such person's
shares.
(2) Represents shares of common stock issuable upon the exercise of the
options exercisable at $0.48 per share until August 1, 2000.
(3) Represents shares of common stock issuable upon the exercise of the
options exercisable at $.048 per share until August 1, 2000.
(4) Includes 200,000 options to purchase common shares at $0.50 per share
pursuant to the share purchase agreement between JAWS U.S. and JAWS Canada dated
February 10, 1998. Includes 116,667 shares issuable upon the exercise of
options exercisable at $0.48 until June 30, 2008
(5) Includes 200,000 options to purchase common shares at $0.50 per share
pursuant to the share purchase agreement between JAWS U.S. and JAWS Canada dated
February 10, 1998
(6) Includes 16,500 options to purchase common shares at $0.48 per share
until June 30, 2008.
(7) Represents shares of common stock issuable upon the exercise of options
exercisable at $0.37 per share until June 30, 2008.
(8) Includes 100,000 options to purchase common shares at $0.15 per share
until June 30, 2008.
1998 STOCK OPTION PLAN
In July 1998, JAWS adopted the 1998 Stock Option Plan ("SOP") which
provides for the grant of incentive and restricted stock options to purchase 20%
of the outstanding shares of common stock.
The purpose of the SOP is to enable JAWS to attract and retain qualified
persons as employees, officers and directors and to motivate such persons by
providing them with an equity participation in JAWS. The options granted, which
are intended to qualify as Incentive Stock Options under Section 422 of the U.S.
Internal Revenue Code of 1986, as amended (the "Code"), is designed to afford
qualified optionees certain tax benefits available under the Code.
The SOP is administered by the Board who is authorized to appoint a stock
option committee to determine the persons entitled to receive options.
The maximum number of shares which an option may grant to any employee or
director, in any one calendar year, is 500,000 shares. The purchase price, for
the common shares subject to the SOP, is determined by the plan administrator at
the time of the grant, but shall not be less than the par value per common
share. The purchase price for shares subject to any Incentive Stock Option shall
not be less than 100% of the fair market value of the shares of common stock of
JAWS on the date the option is granted. In the case of an Incentive Stock Option
granted to an employee who owns stock possessing more than 10% of the total
combined voting power of all classes of stock of JAWS or its subsidiaries, the
exercise price shall not be less than 110% of the fair market value per share of
the common stock JAWS on the date the option is granted.
As of August 4, 1999 JAWS had granted options under the SOP to purchase a
total of 2,392,600 shares of common stock at exercise prices ranging from $.15
to $2.44 per share. Of such options, 920,500 options to were granted to officers
and directors that expire in July, 2008 and 400,000 options expire August 1,
2000. The balance of options outstanding have been issued to employees.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONSCERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
CONSULTING FEES
Since inception in 1997, JAWS has paid consulting fees in an amount of
$120,486 to Robert Kubbernus, and $14,514 was paid to Bankton Financial Corp., a
corporation managed by Robert KubbernusSee "Financial Statements".
DIRECTORS' AGREEMENT
Each of Ms. Julia Johnson and Mr. Arthur Wong have entered into agreements
with JAWS pursuant to which they have agreed to act as a director on the Board
for a period of eighteen months. In consideration of such services, the
agreement grants each of such directors a fee of stock or cash equal to
$60,000US. In addition, the directors have been granted options to purchase
200,000 shares of JAWS at a price per common share equal to $0.48 per share,
exercisable until August 1, 2000.
LEASE OF PREMISES
JAWS entered into an agreement to lease premises from Shelbourne Place
Holding Corp. Riaz Mamdani, the Chief Financial Officer of JAWS, owns 51% of
Shelbourne. The lease began on November 1, 1998 and is for a five year term.
SELLING SECURITY HOLDERSSELLING SECURITY HOLDERS
Unless otherwise indicated, none of the selling security holders holds any
office or position with JAWS, or has a material relationship with JAWS.
SELLING SECURITY HOLDER SHARES OF COMMON STOCK BENEFICIALLY OWNED PRIOR
TO THIS OFFERING(2)
- ----------------------------- ------------------------------------------------
Thomson Kernaghan & Co., Ltd. 16,154,900(3)
0
Bristol Asset Management. . . 1,000,000(4)
SELLING SECURITY HOLDER SHARES THAT MAY BE OFFERED PURSUANT TO THIS PROSPECTUS
SHARES OF COMMON STOCK OWNED AFTER THIS OFFERING(1)
- ------------------------ ---------------------------------------------------
Thomson Kernaghan & Co., Ltd. 16,154,900 0
Bristol Asset Management. . . 1,000,000
(1) Assuming all the shares issuable upon exercise or conversion of the
securities are sold.
(2) Issuable on conversion of debentures and exercise of warrants.
(3) Includes 2,351,649 common shares issuable upon the exercise of warrants.
(4) Represents 1,000,000 warrants.
DESCRIPTION OF SECURITIESDESCRIPTION OF SECURITIES
In April 1999, JAWS increased its authorized shares from 20,000,000 shares
of common stock to 95,000,000 shares of common stock, with a par value $.001 per
share. Authorized preferred stock remains at 5,000,000 shares, with a par value
$.001 per share. As of August 4, 1999 there were 13,061,949 shares of common
stock issued and outstanding and no shares of preferred stock issued or
outstanding
COMMON STOCK
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may
be applicable to the holders of outstanding shares of preferred stock, if any,
the holders of common stock are entitled to receive ratably such dividends, if
any, as may be declared from time to time by the board of directors, out of
funds legally available therefore. See "Dividend Policy." In the event of
liquidation, dissolution or winding up of the company, and subject to the prior
distribution rights of the holders of outstanding shares of preferred stock, if
any, the holders of shares of common stock shall be entitled to receive, pro
rata, all of the remaining assets of JAWS available for distribution to its
stockholders. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock. All outstanding shares of common stock are
fully paid and nonassessable.
PREFERRED STOCK
The board of directors is authorized, subject to any limitations prescribed
by the laws of the State of Nevada, with approval by JAWS's stockholders, to
provide for the issuance of up to 5,000,000 shares of preferred stock in one or
more series, to establish from time to time the number of shares to be included
in each such series, to fix the designations, powers, preferences and rights of
the shares of each such series and any qualifications, limitations or
restrictions thereof, and to increase or decrease the number of shares of any
such series (but not below the number of shares of such series then outstanding)
without any further vote or action by the stockholders. The board of directors
may authorize and issue preferred stock with voting or conversion rights that
could adversely affect the voting power or other rights of the holders of
Shares.
NEVADA ANTI-TAKEOVER LEGISLATION
Nevada law includes certain provisions, which prevent third parties from
taking over Nevada corporations. The Nevada Control Share Act generally
provides that shares acquired in excess of certain specified thresholds will not
possess any voting rights unless such voting rights are approved by a majority
of a corporation's disinterested shareholders. The Nevada Affiliated
Transactions Act generally requires super majority approval by disinterested
shareholders of certain specified transactions between a public corporation and
holders of more than 10% of the outstanding voting shares of the corporation (or
their affiliates). Nevada law and JAWS Articles and Bylaws also authorize us to
indemnify JAWS Directors, Officers, employees and agents. In addition, JAWS
Articles and Nevada law presently limit the personal liability of corporate
Directors for monetary damages, except where the directors (i) breach their
fiduciary duties and (ii) such breach constitutes or includes certain violations
of criminal law, a transaction from which the Directors derived an improper
personal benefit, certain unlawful distributions or certain other reckless,
wanton or willful acts or misconduct.
ANTI-TAKEOVER EFFECTS OF PROVISIONS OF JAWS ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of the articles and bylaws of JAWS summarized in the
following paragraphs, and above under the section entitled "Preferred Stock,"
may be deemed to have an anti-takeover effect and may delay, defer or prevent a
tender offer or takeover attempt, including attempts that might result in a
premium being paid over the market price for the shares held by shareholders.
The following provisions may not be amended in JAWS Articles or Bylaws without
the affirmative vote of the holders of at least two-thirds of the outstanding
shares of JAWS common stock. The Articles and Bylaws provide that special
meetings of shareholders of JAWS may be called only by JAWS board of directors,
or holders of not less than 10% of JAWS' outstanding voting stock entitled to
vote at the special meeting.
Despite the belief of JAWS as to the benefits to shareholders of these
provisions of JAWS Articles of Incorporation, these provisions may also have the
effect of discouraging a future takeover attempt which would not be approved by
JAWS Board, but pursuant to which the shareholders may receive a substantial
premium for their shares over then current market prices. As a result,
shareholders who might desire to participate in such a transaction may not have
any opportunity to do so. Such provisions will also render the removal of the
JAWS board of directors and management more difficult and may tend to stabilize
JAWS stock price, thus limiting gains which might otherwise be reflected in
price increases due to a potential merger or acquisition. The board of
directors, however, has concluded that the potential benefits of these
provisions outweigh the possible disadvantages. Pursuant to applicable
regulations, at any annual or special meeting of its shareholders, JAWS may
adopt additional Articles of Incorporation provisions regarding the acquisition
of its equity securities that would be permitted to a Nevada corporation.
TRANSFER AGENT
JAWS transfer agent for its common stock is U.S. Stock Transfer
Corporation, 1745 Gardena Avenue, Glendale, California 91204-2991.
SHARES ELIGIBLE FOR FUTURE SALESHARES ELIGIBLE FOR FUTURE SALE
On the date of this prospectus, JAWS has 13,061,949 shares of common stock
outstanding not including up to 2,392,600 shares of common stock that may be
issued upon the exercise of options. Of the outstanding shares (i) 9,079,761
are freely tradable without restriction under the Securities Act (ii) 17,154,900
shares of common stock being registered in this prospectus will be freely
tradable without restriction under the Securities Act, (iii) 92,000 shares are
"Restricted Securities" but were eligible for resale pursuant to Rule 144
promulgated under the Act beginning in July1999; and (iv) 3,890,188shares are
"Restricted Securities" but will be eligible for resale pursuant to Rule 144
between December 15, 1999 and June 21, 2000.
Under Rule 144, a person (or persons whose shares are aggregated) who has
beneficially owned restricted securities for at least one year, including the
holding period of any prior owner except an affiliate, would be generally
entitled to sell within any three month period a number of shares that does not
exceed the greater of (i) 1% of the number of then outstanding shares of the
common stock or (ii) the average weekly trading volume of the common stock in
the public market during the four calendar weeks preceding such sale. Sales
under Rule 144 are also subject to certain number of sale provisions, notice
requirements and to the availability of current public information about JAWS.
Any person (or persons whose shares are aggregated) who is not deemed to have
been an affiliate of JAWS at any time during the three months preceding a sale,
and who has beneficially owned shares for at least two years (including any
period of ownership of preceding nonaffiliated holders), would be entitled to
sell such shares under Rule 144(k) without regard to the volume limitations,
manner-of-sale provisions, public information requirements or notice
requirements.
The availability for sale of substantial amounts of common stock subsequent
to this offering could adversely affect the prevailing market price of the
common stock and could impair JAWS' ability to raise additional capital through
the sale of its equity securities. Prospective investors should be aware that
the possibility of such sales may, in the future, have a depressive effect on
the price of JAWS' common stock in any market which may develop and, therefore,
the ability of any investor to market his shares may be dependent directly upon
the number of shares that are offered and sold. Affiliates of JAWS may sell
their shares during a favorable movement in the market price of JAWS common
stock ,which may have a depressive effect on its price per share. See
"Description of Securities," "Principal Shareholders" and "Risk Factors."
PLAN OF DISTRIBUTIONPLAN OF DISTRIBUTION
The selling security holders may offer their Shares at various times in one
or more of the following transactions: in the over-the-counter market where JAWS
common stock is listed; transactions other than in the over-the-counter market;
in connection with short sales of JAWS common stock; by pledgees or donees; or a
combination of any of the above transactions.
The selling security holders may sell their shares at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices and at negotiated prices or at fixed prices.
The selling security holders may use broker dealers to sell their shares.
If this happens, broker dealers will either receive discounts or commissions
from the selling security holders, or they will receive commissions from
purchasers of shares for whom they acted as agents.
JAWS has advised the selling security holders that during such time as they
may be engaged in a distribution of the shares they are required to comply with
Regulation M under the Securities Exchange Act of 1934. Regulation M generally
precludes any selling security holders, any affiliated purchasers and any
broker-dealer or other person who participates in such distribution from bidding
for or purchasing, or attempting to induce any person to bid for or purchase,
any security which is the subject of the distribution until the entire
distribution is complete. Regulation M also prohibits any bids or purchase made
in order to stabilize the price of a security in connection with the
distribution of that security. All of the foregoing may affect the
marketability of the common stock.
It is anticipated that the selling security holders will offer all of the
shares for sale. Further, because it is possible that a significant number of
shares could be sold at the same time hereunder, such sales, or the possibility
thereof, may have a depressive effect on the market price of JAWS common stock.
LEGAL MATTERSLEGAL MATTERS
The validity of the Securities offered hereby will be passed upon for JAWS
by Sonfield & Sonfield, Houston, Texas.
EXPERTSEXPERTS
The Consolidated Financial Statements as of December 31, 1998 and 1997, of
JAWS Technologies, Inc. audited by Ernst & Young LLP, have been included herein
in reliance on the authority of their report dated March 22, 1999 as experts in
accounting and auditing.
WHERE INVESTORS CAN FIND MORE INFORMATIONWHERE YOU CAN FIND MORE INFORMATION
JAWS intends to furnish to its shareholders annual reports, which will
include financial statements audited by independent accountants, and such other
periodic reports as it may determine to furnish or as may be required by law,
including sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as
amended.
JAWS has filed a registration statement with the Securities Exchange
Commission under the Securities Act with respect to the shares registered
hereby. This Prospectus omits certain information contained in the registration
statement as permitted by the rules and regulations of the Commission. For
further information about respect to JAWS Technologies, Inc. and JAWS common
stock, investors should read the registration statement, including the exhibits
included with it. Statements in this Prospectus about the contents of any
contract or any other document are not necessarily complete; investors should
read such contract or other document filed with the Commission as an exhibit to
the registration statement. The registration statement, including all of the
attached exhibits and schedules, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, NW, Washington, D.C. 20549. Copies of such materials can be
obtained from the Public Reference Section of the Commission, 450 Fifth Street,
NW, Washington, D.C. 20549, at prescribed rates. JAWS will file registration
statements (including this one) and other documents and reports electronically
through the Electronic Data Gathering, Analysis and Retrieval System ("EDGAR")
which is publicly available through the Commission's Internet World Wide
website, http://www.sec.gov.
Commission's Internet World Wide website, http://www.sec.gov.
<PAGE>
- ------
INDEX TO FINANCIAL STATEMENTSINDEX TO FINANCIAL STATEMENTS
CONSOLIDATED FINANCIAL STATEMENTS
JAWS TECHNOLOGIES, INC.
MARCH 31, 1999
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . F - 2
Consolidated Balance Sheets. . . . . . . . . . . . . . . . . . . . F - 3
Consolidated Statements of Loss and Deficit and Comprehensive Loss F - 4
Consolidated Statement of Changes in Stockholders' Equity. . . . . F - 5
Consolidated Statements of Cash Flow . . . . . . . . . . . . . . . F - 6
Notes to Consolidated Financial Statements . . . . . . . . . . F - 7-17
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
JAWS TECHNOLOGIES, INC.
We have audited the accompanying consolidated balance sheets of JAWS
TECHNOLOGIES, INC. as at December 31, 1998 and 1997 and the related consolidated
statements of loss and deficit and comprehensive loss, changes in stockholders'
equity and cash flows for the year ended December 31, 1998 and for the period
from the date of incorporation on January 27, 1997 to December 31, 1997 and for
the cumulative period ended December 31, 1998 since inception. These financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with U.S. generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Jaws
Technologies, Inc. as at December 31, 1998 and December 31, 1997 and the
consolidated results of its operations and its consolidated cash flows for the
year ended December 31, 1998 and for the period from the date of incorporation
on January 27, 1997 to December 31, 1997 and for the cumulative period since
inception in conformity with accounting principles generally accepted in the
United States.
As discussed in Note 1 to the financial statements, the Company's recurring
losses from operations and net capital deficiency raise substantial doubts about
its ability to continue as a going concern. Management's plans as to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Calgary, Canada [signed: Ernst & Young LLP]
March 22, 1999 Chartered Accountants
except for Note 17 which is as at
April 26, 1999.
JAWS TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(all amounts are expressed in U.S. dollars)
(see basis of presentation - note 1)
MARCH 31,
1999 DECEMBER 31, 1998 DECEMBER 31, 1997
-------------------
$ $ $
(unaudited)
-----------
ASSETS
CURRENT
Cash 50,428 33,732 111
Accounts receivable 24,738 7,243 -
Due from related parties [note 6] 10,708 13,118 -
Prepaid expenses and deposits 113,936 140,456 7,500
199,810 194,549 7,611
Fixed assets, net of $24,976 (December 31, 1998 - $13,461) (December 31, 1997 -
$1,160) accumulated depreciation [note 4] 307,105 78,830 2,320
506,915 273,379 9,931
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
CURRENT
Accounts payable 726,559 379,720 32,976
Accrued liabilities 174,284 48,880 -
Current portion of capital lease obligations payable [note 11] 5,950 -
- -
Due to related parties [note 6] 202,304 197,115 -
1,109,097 625,715 32,976
Capital lease obligations payable [note 11] 19,144 - -
Due to stockholders [note 6] 21,659 74,717 78,159
Convertible debentures [note 7] 632,664 146,606 -
673,476 221,323 78,159
COMMITMENT AND CONTINGENCIES [NOTES 10 AND 16]
STOCKHOLDERS' DEFICIENCY
Authorized
95,000,000 common shares at $0.001 par value
5,000,000 preferred shares at $0.001 par value
Common stock issued and paid-up [note 5] 10,929 10,612 4,000
Capital in excess of par value 2,313,336 2,212,153 31,650
Contributed surplus 836,134 425,559 -
Foreign currency translation adjustment (20,922) (8,842) -
- ------------------------------------------ -------- -------
Deficit (4,415,126) (3,213,141) (136,854)
(1,275,649) (573,659) (101,204)
---------
506,915 273,379 9,931
------- ------- -----
See accompanying notes
On behalf of the Board:
Director Director
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF LOSS AND DEFICIT AND COMPREHENSIVE LOSS
(all amounts are expressed in U.S. dollars)
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31
1999 1998 1998 1997
$ . . . . . . . . . . . . $ $ $
(unaudited) . . . . . . . . . . . . . . . (unaudited)
- --------------------------- ------------
REVENUE [note 6]. . . . . . 3,047 - 29,068 -
EXPENSES [note 6]
Accounting and legal. . . . 49,907 19,835 186,128 69,952
Advertising and promotion . 149,248 5,193 218,574 35,000
Consulting. . . . . . . . . 83,767 77,027 514,894 30,731
Depreciation and amortization 11,450 1,683 14,041 580
Directors' fees . . . . . . 32,499 - 33,333 -
Management fees . .. . . . . 45,033 - - -
Amortization of deferred
financing fees [note 7]. 8,113 - 5,158 -
Foreign exchange loss . . . 9,929 - (431) -
Non cash interest expense . . 438,520 - 381,688 -
Interest expense and bank charges 1,252 - 2,869 -
Investor relations. . . . . . . . 13,288 - 258,016 -
Office and administration . . . . 23,428 - 83,143 -
Other . . . . . . . . . . .. . 65,799 13,975 52,928 591
Rent. . . . . . . . . . . . . 40,327 2,799 29,637 -
Travel. . . . . . . . . . . . 68,940 - 132,646 -
Wages and employee benefits . 163,532 3,143 283,728 -
Software development costs [note 3] - 909,003 909,003 -
1,205,032 1,032,658 3,105,355 136,854
LOSS FOR THE PERIOD [NOTE 8].. (1,201,985) (1,032,658) 3,076,287) (136,854)
- ------------------------------
OTHER COMPREHENSIVE LOSS
Foreign currency translation
adjustment . . . . . (12,080) 1,903 (8,842) -
COMPREHENSIVE LOSS. . . . . (1,214,065) (1,030,755) (3,085,129) (136,854)
- ----------------------- ------------ ------------ ------------ ----------
DEFICIT, BEGINNING OF PERIOD . (3,213,141) (136,854) (136,854) -
LOSS FOR THE PERIOD . . . . . . (1,201,985) (1,032,658) (3,076,287) (136,854)
DEFICIT, END OF PERIOD. . . . (4,415,126) (1,169,512) (3,213,141) 136,854)
- ----------------------- ------------ ------------ ------------ ----------
Loss per common share . . . . . (0.11) (0.20) (0.42) (0.03)
Weighted average number of
shares outstanding . . 10,670,321 5,121,111 7,405,421 4,000,000
- --------------------- ------------ ------------ ------------ ----------
See accompanying notes
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(all amounts are expressed in U.S. dollars)
CAPITAL IN
SHARES PAR VALUE EXCESS OF PAR VALUE
$ $ $
----------- ---------- ---------------------
BALANCE, JANUARY 27, 1997
Issuance of common stock for cash . . 4,000,000 4,000 56,000
Less share issue costs. . . . . . - - (24,350)
BALANCE, DECEMBER 31, 1997. . . . . .. 4,000,000 4,000 31,650
- ------------------------------- ----------- ---------- ---------------------
Issuance of common stock for services
[note 5]. . . . . . . . . . . . . . 400,000 400 199,600
- ------------------------------- ----------- ---------- ---------------------
Issuance of common stock on acquisition
of subsidiary [note 3]. . . . . . 1,500,000 1,500 838,248
Issuance of common stock for cash . . . 2,800,000 2,800 1,017,200
Warrants issued with issuance of
convertible debentures [note 7]. . . . . - - -
Equity component of convertible debentures
[note 7] . . . . . . . . . . . - - -
Equity component of financing fees [note 7] - - -
Equity component of financing fees [note 7] - - -
Issue of common stock upon conversion of
convertible debentures [note 7]. 1,912,317 1,912 211,886
Financing fee associated with converted
debentures [note 7] . . . . . . . - - (21,117)
Share issue costs . . . . . . . . . - - (65,314)
BALANCE, DECEMBER 31, 1998. . .. . . . ,612,317 10,612 2,212,153
(UNAUDITED)
- ----------------------------------------------------
Issuance of common stock for cash . . 317,188 317 101,183
Equity component of convertible
debentures [note 7] . . . . . . . . . . . - - -
Equity component of financing fees
[note 7] . . . . . . . . . . . . . . . - - -
BALANCE, MARCH 31, 1999 . . . . . . . 10,929,505 10,929 2,313,336
CONTRIBUTED SURPLUS
BALANCE, JANUARY 27, 1997
Issuance of common stock for cash . . . . . . . . . . . . . 60,000
Less share issue costs. . . . . . . . . . . . . . . . . . (24,350)
BALANCE, DECEMBER 31, 1997. . . . . . . . . . . . . . . . . -
- ---------------------------------------------------------- --------------------
Issuance of common stock for services [note 5]. . . . . .. -
- ---------------------------------------------------------- --------------------
Issuance of common stock on acquisition of subsidiary [note 3]. . . . . -
Issuance of common stock for cash . . . . . . . . . . . . . . . . . . . -
Warrants issued with issuance of convertible debentures [note 7]. .. . 342,857
Equity component of convertible debentures [note 7] . . . . . .. . . . .118,462
Equity component of financing fees [note 7] . . . . . . . . . . . . . . (11,760)
Equity component of financing fees [note 7] . . . . . . . . . . . . . (24,000)
Issue of common stock upon conversion of convertible debentures [note 7]. -
Financing fee associated with converted debentures [note 7] . . . . . . -
Share issue costs
BALANCE, DECEMBER 31, 1998. . . . . . . . . . . . . . . . . . . . . 425,559
(UNAUDITED)
- -------------------------------------------------------------------
Issuance of common stock for cash . . . . . . . . . . . .. . . . . -
Equity component of convertible debentures [note 7] . . .. . . . . 424,575
Equity component of financing fees [note 7] . . . . . . . . . . . (14,000)
BALANCE, MARCH 31, 1999 . . . . . . . . . . . . . . . . . . . . . . 836,134
See accompanying notes
JAWS TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(all amounts are expressed in U.S. dollars)
THREE MONTHS ENDED YEAR ENDED
MARCH 31, DECEMBER 31
------------ -------------
1999 1998 1998
$. . . . . . . . . . . . . . . .. . . . . . $ $ $
(unaudited) .. . . . . . . . . .. . . . . . . . . . . . . . . (unaudited)
- ----------------------------------------------------------------- ----------
CASH FLOWS USED IN OPERATING ACTIVITIES
Loss for the period . . . . .. . .. (1,201,985) (1,032,658) (3,076,287)
Adjustments to reconcile loss to cash flows used in operating activities:
Consulting expense not involving
the payment of cash [note 5] . - 25,000 200,000
Depreciation and amortization . . . . 11,450 1,683 14,041
Amortization of deferred financing fees 8,113 - 5,158
Software development costs. . . . - 909,003 909,003
Non-cash interest expense on warrants - - 257,143
Non-cash interest expense on convertible
debentures . . . . . . . .. . 424,575 - 118,462
Non-cash interest expense on convertible
debenture conversion and accrued interest. 13,945 - 6,083
Foreign exchange loss . .. . . . . . . 9,929 - -
Changes in non-cash working capital
balances [note 12]. . . . . . . 488,867 18,191 439,422
(245,106) (78,781) (1,126,975)
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of fixed assets. . . . . . (234,390) (9,656) (96,502))
Other . . . . . . . . . . .. . (2,250) - (19,082)
(236,640) (9,656) (115,584)
CASH FLOWS GENERATED BY FINANCING ACTIVITIES
Proceeds from the issuance of common stock,
net of issue costs. . . . . . . . 101,500 294,560 954,686
- --------------------------------- ------------ ------------- ------------
Repayment of stockholder loans. . . (62,591) (50,993) (78,159)
Proceeds from advances. . . . . . . 9,533 - 20,273
Proceeds received on issue of
convertible debenture . . . . . . 500,000 - 420,000
Financing fees on issue of convertible
debenture. . . . . . . . . . .. . . .(50,000) - (42,000)
498,442 243,567 1,274,800
------------ ------------- ------------
INCREASE IN CASH. . . . . . . . . 16,696 155,130 32,241
Cash acquired on acquisition of subsidiary - 1,380 1,380
Cash, beginning of period . . . . . 33,732 111 111
CASH, END OF PERIOD . . . . .. . . . 50,428 156,621 33,732
1997
$
(unaudited)
- ------------------------------------------------------------
CASH FLOWS USED IN OPERATING ACTIVITIES
Loss for the period . . . . . . . . . . . . . . . . . . . . . . . . (136,854)
Adjustments to reconcile loss to cash flows used in operating activities:
Consulting expense not involving the payment of cash [note 5] . . . . -
Depreciation and amortization . . . . . . . . . . . . . . . .. . . . 580
Amortization of deferred financing fees . . . . . . . . . . . . . . -
Software development costs. . . . . . . . . . .. . . . . . . . . . . -
Non-cash interest expense on warrants . . . . . . . . . . . . . . -
Non-cash interest expense on convertible debentures . . . . . . . . -
Non-cash interest expense on convertible debenture conversion
and accrued interest. -
Foreign exchange loss
Changes in non-cash working capital balances [note 12]. . .. . . . . 25,476
(110,798)
---------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchase of fixed assets. . . . . . . . . . . . . . . . . . . (2,900)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . -
(2,900)
CASH FLOWS GENERATED BY FINANCING ACTIVITIES
Proceeds from the issuance of common stock, net of issue costs. . . . 35,650
- --------------------------------------------------------------------
Repayment of stockholder loans. . . . . . . . . . . . .. . . . . 78,159
Proceeds from advances. . . . . . . . . . . . . . . . . . . . . . -
Proceeds received on issue of convertible debenture . . . . . . . -
Financing fees on issue of convertible debenture. . . . . . . . . . -
113,809
---------
INCREASE IN CASH. . . . . . . . . . . . . . . . . . . . . . . . . 111
Cash acquired on acquisition of subsidiary. . . . . . . . . . . . -
Cash, beginning of period . . . . . . . . . . . . . . . . . . . -
CASH, END OF PERIOD . . . . . . . . . . . . . . . . . . . . 111
See accompanying notes
1. BASIS OF PRESENTATION
Jaws Technologies, Inc., (the "Company") was incorporated on January 27, 1997
under the laws of the State of Nevada as "E-Biz" Solutions, IncOn March 27,
1998, "E-Biz" Solutions, Inc. changed its name to Jaws Technologies, Inc The
business purpose is developing and selling encryption software. These activities
are carried out through the Company's wholly owned Canadian subsidiary.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements, the Company is continuing to develop its product and has a deficit
of $4,415,126, a working capital deficiency of $909,287 and a stockholders'
deficiency of $1,275,649 as at March 31, 1999. The Company's continuation as a
going concern is dependent on its ability to generate sufficient cash flow, to
meet its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations. However, no assurance
can be given at this time as to whether the Company will achieve any of these
conditions. These factors, among others, raise substantial doubt about the
Company's ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that
might be necessary should the Company be unable to continue as a going concern
for a reasonable period of time.
Management believes that additional funding will be required to finance expected
operations until a market has been developed for the Company's software.
Management intends to seek additional financing through future private or public
offerings of stock and through the exercise of stock options.
The accompanying financial statements reflect all adjustments which are, in the
opinion of management, necessary to reflect a fair presentation for the periods
being presented.
2. SIGNIFICANT ACCOUNTING POLICIES
The financial statements have, in management's opinion, been properly prepared
in accordance with accounting principles generally accepted in the United
States.
USE OF ESTIMATES
Because a precise determination of many assets and liabilities is dependent upon
future events, the preparation of financial statements for a period necessarily
involves the use of estimates which would affect the amount of recorded assets,
liabilities, revenues and expenses. Actual amounts could differ from these
estimates.
CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, Jaws Technologies, Inc., an Alberta, Canada
corporation, after elimination of intercompany accounts and transactions.
FIXED ASSETS
Fixed assets are recorded at cost and are depreciated at the following annual
rates which are designed to amortize the cost of the assets over their estimated
useful lives.
Furniture and fixtures - 20% diminishing balance
Computer hardware - 33% straight line
Computer software for internal use - 33% straight line
Leasehold improvements - 20% straight line
Office equipment - 18% straight line
SOFTWARE DEVELOPMENT
Software development costs are expensed when technological feasibility has not
yet been established. Subsequent to establishing technological feasibility,
such costs are capitalized until the commencement of commercial sales.
FINANCING FEES
Financing fees associated with that portion of the 10% convertible debentures
classified as debt are deferred and amortized over the life of the debentures.
Financing fees associated with that portion of the convertible debentures
classified as contributed surplus is charged to that account. The pro rata
portion of financing fees associated with converted debentures is charged to
share capital in excess of par value.
REVENUE
Revenue from selling encryption software is recognized when the software is
delivered.
ADVERTISING
Advertising costs are expensed as incurred.
INCOME TAXES
The Company follows the liability method of accounting for the tax effect of
temporary differences between the carrying amount and the tax basis of the
company's assets and liabilities. Temporary differences arise when the
realization of an asset or the settlement of a liability would give rise to
either an increase or decrease in the Company's income taxes payable for the
year or later period. Deferred income taxes are recorded at the income tax
rates that are expected to apply when the deferred tax liability is settled or
the deferred tax asset is realized. When necessary, valuation allowances are
established to reduce deferred income tax assets to the amount expected to be
realized. Income tax expense is the tax payable for the period and the change
during the period in deferred income tax assets and liabilities.
FOREIGN CURRENCY TRANSLATION
The functional currency of the Company's subsidiary is the Canadian dollar.
Accordingly, assets and liabilities of the subsidiary are translated at the
year-end exchange rate and revenues and expenses are translated at average
exchange rates. Gains and losses arising from the translation of the financial
statements of the subsidiary are recorded in a "Foreign Currency Translation
Adjustment" account in stockholders' equity.
LOSS PER COMMON SHARE
The loss per common share has been calculated based on the weighted average
number of common shares outstanding during the period. Diluted earnings per
share, assuming all warrants, options and conversion features were exercised,
does not differ from basic earnings per share.
STOCK OPTIONS
The Company applies the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans. Accordingly,
no compensation cost is recognized in the accounts as options are granted with
an exercise price that approximates the prevailing market price.
PRIOR YEAR AMOUNTS
Certain prior year amounts have been reclassified to conform to the presentation
adopted in 1998.
3. ACQUISITION
On February 10, 1998 the Company issued 1,500,000 restricted common shares, as
well as options to purchase 400,000 shares of its restricted common stock at
$0.50 per share in exchange for all of the outstanding common stock of Jaws
Technologies, Inc., an Alberta, Canada corporation ("Jaws Alberta"). The
options issued in connection with the acquisition have been ascribed no value.
Jaws Alberta at the time of acquisition was in the process of creating a new
encryption software product. The acquisition has been accounted for by the
purchase method.
The purchase price, and thereby the amounts allocated to software and the shares
issued, net of other assets and liabilities acquired, was determined based on
estimates by management as to the replacement cost for the encryption software
development which had been incurred by Jaws Alberta prior to the acquisition
date. The purchase price has been allocated to the net assets acquired based on
their estimated fair values as follows:
$
Net assets acquired
Non-cash working capital . . . . . . (5,087)
Software under development . . . . . 909,003
Fixed assets . . . . . . . . . . . . 2,891
Due to stockholders. . . . . . . . . (54,443)
- ------------------------------------ ---------
Net assets acquired, excluding cash. 852,364
- ------------------------------------
Acquisition costs. . . . . . . . . . (13,996)
Cash acquired. . . . . . . . . . . . 1,380
Net assets acquired for common stock 839,748
The amount allocated to software under development relates to encryption
software and its related algorithms, including the "L5" software. This
software, at the time of purchase, was not completely developed, tested or
otherwise available for sale and therefore has been immediately expensed in the
accompanying consolidated statements of loss and deficit. Coding and testing
activities for this software were completed on July 31, 1998.
The operating results of the acquired company are included in the consolidated
statements of loss, deficit and comprehensive loss from the date of acquisition.
Pro forma loss and pro forma loss per common share for the three month period
- --------------------------------------------------------------------------------
ended March 31, 1998, giving effect to the acquisition of Jaws Alberta as at
- --------------------------------------------------------------------------------
January 1, 1998 are $914,526 and $0.18 respectively (December 31, 1998 -
- --------------------------------------------------------------------------------
$3,083,685 and $0.42 respectively). Pro forma revenue does not differ from that
- --------------------------------------------------------------------------------
recorded for the period to March 31, 1998, being nil, or for the period to
- --------------------------------------------------------------------------------
December 31, 1998, being $29,068.
- -------------------------------------
4. FIXED ASSETS
MARCH 31, 1999
COST ACCUMULATED DEPRECIATION NET BOOK VALUE
------------------------- ------------------------- -------------
$ $ $
------------------------- ------------------------- -------------
Furniture and fixtures . . . . . . 108,942 9,781 99,161
- ----------------------------------
Computer hardware. . . . . . . . . 85,284 10,661 74,623
Computer software for internal use 13,819 2,061 11,758
- ---------------------------------- ----------------------- -------------
Leasehold improvements . . . . . . 98,942 2,473 96,469
Office equipment . . . . . . . . . 25,094 - 25,094
332,081 24,976 307,105
DECEMBER 31,
1998
-------------------------
COST . . . . . . . . . ACCUMULATED DEPRECIATION NET BOOK VALUE
- ------------------------
$. . . . . . . . . . . . . . . . $ $
Furniture and fixtures . . . . . . 31,758 6,482 25,276
- ------------------------------------- ----------------- -----------
Computer hardware. . . . . . . . . 47,371 5,534 41,837
Computer software for internal use 13,162 1,445 11,717
92,291 13,461 78,830
5. SHARE CAPITAL
AUTHORIZED
95,000,000 common shares at $0.001 par value (increased from $20,000,000,
February 4, 1999)
5,000,000 preferred shares at $0.001 par value
COMMON STOCK ISSUED
During 1998, the 400,000 restricted common shares issued for services relate to
- --------------------------------------------------------------------------------
services provided by two consultants in relation to the establishment of the
- --------------------------------------------------------------------------------
capital structure of the Company. The shares were recorded at their estimated
- --------------------------------------------------------------------------------
fair value of $200,000.
- --------------------------
COMMON STOCK HELD IN ESCROW
Upon entering into the 10% convertible debenture agreement (see note 7) the
Company placed 9,500,000 shares in escrow relating to the $2 million of
financing. In addition, 1,071,429 shares and 357,143 shares were placed in
escrow relating to the purchasers' and agent's warrants issued in relation to
the 10% convertible debenture agreement.
OPTIONS
As at March 31, 1999, the Company has issued 2,007,000 options to purchase
common stock to the Company's directors, officers and employees. Of the total
issued, none have been exercised as at March 31, 1999. As at March 31, 1999,
none of the options had vested. Details of the stock options outstanding at
March 31, 1999 are as follows:
NUMBER OF OPTIONS EXERCISE PRICE EXPIRY DATE
-------------- --------------------
200,000 0.15 February 22, 2008
- ----------------- -------------- --------------------
32,000 0.15 June 30, 2008
35,000 0.32 June 30, 2008
81,000 0.33 June 30, 2008
143,000 0.37 June 30, 2008
22,000 0.40 June 30, 2008
80,000 0.44 June 30, 2008
1,106,500 0.48 June 30, 2008
82,500 0.58 June 30, 2008
71,000 0.62 June 30, 2008
10,000 0.65 June 30, 2008
36,000 0.69 June 30, 2008
33,000 0.75 June 30, 2008
75,000 0.77 June 30, 2008
2,007,000
- -----------------
The fair value of each option granted to date is estimated on the date of grant
using the Black-Scholes option-pricing model with the following assumptions:
expected volatility of 153%; risk-free interest rate of 4.0%; no payment of
common share dividends; and expected life of 10 years. Had the compensation
cost for these plans been determined based upon the fair value at the grant
date, been consistent with the methodology prescribed in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based compensation," the
Company's loss and loss per common share for the three month period ended March
31, 1999 would have been $1,303,187 and $0.12 respectively (December 31, 1998
$3,324,618 and $0.45 respectively).
6. RELATED PARTY TRANSACTIONS
Amounts due to related parties consist of the following amounts:
MARCH 31, DECEMBER 31,
1999 1998 DECEMBER 31, 1997
$ $ $
- ----------------------------- --------
DUE FROM RELATED PARTIES
Futurelink Distribution Corp. 10,708 9,073 -
Futurelink/Sysgold Ltd. . . . - 4,045 -
10,708 13,118 -
DUE TO RELATED PARTIES
Officers and stockholders . . 67,202 43,588 -
Futurelink Distribution Corp. - 32,175 -
Willson Stationers Ltd. . . . 2,601 1,352 -
Directors . . . . . . . . . . 132,501 120,000 -
202,304 197,115 -
DUE TO STOCKHOLDERS
Bankton Financial Corporation 15,628 15,775 -
Cameron Chell . . . . . . . . 1,986 1,957 -
Hampton Park Ltd. . . . . . . 4,045 56,985 -
Other stockholder . . . . . . - - 78,159
21,659 74,717 78,159
During the year ended December 31, 1998, the Company incurred $76,612 in fees
associated with computer services provided by Futurelink Distribution Corp., an
entity of which certain directors are also directors of the Company. There were
no similar fees incurred during the period ended March 31, 1999. The Company
provided sales to Futurelink Distribution Corp. during the period ended March
31, 1999 in the amount of $1,175 (December 31, 1998 - $9,073), all of which is
included in the amounts due from related parties at March 31, 1999. The fees
charged by and sales provided to Futurelink Distribution Corp. are recorded at
their exchange amounts.
During the year ended December 31, 1998, the Company provided services of $4,045
to Futurelink/Sysgold Ltd., an entity of which certain directors are also
directors of the Company. This amount was included in due from related parties
at December 31, 1999. These services are provided on normal commercial terms and
conditions. No services were provided to Futurelink/Sysgold Ltd. during the
period ended March 31, 1999.
Office and administration expenses for the three month period ended March 31,
1999, include $2,563 (December 31, 1998 - $8,035) paid to Willson Stationers
Ltd., an entity of which certain directors are also directors and officers of
the Company. These transactions are recorded at their exchange amounts.
Consulting fees for the year ended December 31, 1998, include $198,168 to
officers and stockholders of the Company for services provided.
Due to stockholders represents advances received by the Company. The amount due
to Hampton Park Ltd., a company owned by a stockholder, bears interest at 8% per
annum and has no set repayment terms. The remaining amounts due to stockholders
do not carry interest and have no set repayment terms. All stockholders have
indicated they do not intend to demand repayment within the next year.
The Company entered into an agreement to lease premises from a stockholder. The
lease began on November 1, 1998 and is for a five year term. The minimum rent
is $9.27 per square foot per annum with 9,920 square feet of net rentable area.
Additional rent is estimated at $3.97 per square foot of net rentable area per
annum. The net rent expense rate recognized in the three month period ended
March 31, 1999 was $5,986, (year ended December 31, 1998 - $3,991).
7. CONVERTIBLE DEBENTURES
DECEMBER 31
MARCH 31, 1999 1998
$ $
--------- ----------
PRINCIPAL
Net balance outstanding, beginning of period . .. . . . 146,606 -
Funds advanced to date . . . . . . . . . . . . .. . . . . 500,000 420,000
Debentures converted during the period . . . . . . . . . - (210,000)
646,606 210,000
FINANCING FEES
Fees paid on funds advanced to date. . . . . . . . .. . . (50,000) (42,000)
Intrinsic value associated with equity component of debentures 14,000 11,760
Fees paid through issuance of warrants to agent. . . . . . - (85,714)
Intrinsic value associated with equity component of debentures - 24,000
Amortization of financing fees to date . . . . . . . . 8,113 5,158
Financing fees associated with debentures converted to date. . - 21,117
(27,887) (65,679)
INTEREST EXPENSE
Accrued interest expense . . . . . . . . . . . . . . 13,945 2,285
NET BALANCE OUTSTANDING, END OF PERIOD . . . . .. . . . 632,664 146,606
On September 25, 1998, the Company entered into an agreement to issue 10%
convertible debentures in series of $200,000 up to a total of $2,000,000,
subject to the Company meeting certain conditions, which mature on October 31,
2001. The holders have the right to convert the debentures in increments of at
least $100,000, at a price equal to the lower of $0.28 and 78% of the average
closing bid price of the Company's common stock for the three trading days
immediately preceding the Notice of Conversion served on the Company. For the
$500,000 of convertible debentures that were issued on January 26, 1999,
$250,000 of debentures can be converted at a fixed price of $0.40 per common
share and the remaining $250,000 can be converted into shares at a fixed rate of
$0.28 per common share. The Company may prepay any or all of the outstanding
principal amounts at any time, upon thirty days' notice, subject to the holders'
right to convert into common shares. A financing fee of 10% is charged on the
principal sum of each convertible debenture issued. Interest is payable on the
maturity date. At the holders' election, interest can be settled in common
stock of the Company based on market prices.
Through March 31, 1999, the Company has issued convertible debentures totalling
$920,000 of which $543,037 was recorded as contributed surplus with an
offsetting amount charged as interest on long term debt. Of the debentures
issued, $210,000 principal plus $3,798 interest was converted into 1,912,317
shares on November 30, 1998. Interest totalling $16,230 has been accrued and
included in the convertible debenture balance outstanding at March 31, 1999.
These shares will be formally issued when the Company's SB-2 Registrations
Statement has been declared effective.
At the time of the initial funding on October 1, 1998, the Company issued
- --------------------------------------------------------------------------------
1,428,572 common share purchase warrants (357,143 to the agent and 1,071,429 to
- --------------------------------------------------------------------------------
the ultimate subscriber of the issue). Each warrant gives the holder the right
- --------------------------------------------------------------------------------
to purchase one common share of the Company at $0.28 until October 31, 2001. An
- --------------------------------------------------------------------------------
amount of $342,857 has been included in contributed surplus as the estimated
- --------------------------------------------------------------------------------
value attributed to these warrants as they were exercisable upon issuance. In
- --------------------------------------------------------------------------------
addition, the warrants issued to the agent have been treated as a financing fee
- --------------------------------------------------------------------------------
in the amount of $85,714. The value of these fees associated with the equity
- --------------------------------------------------------------------------------
component of the 10% convertible debentures has been charged to contributed
- --------------------------------------------------------------------------------
surplus in the amount of $24,000. The remaining balance is being amortized over
- --------------------------------------------------------------------------------
the life of the 10% convertible debentures.
- -------------------------------------------------
For each issuance of 10% convertible debentures, the Company must pay a
financing fee of 10% which amounted to $92,000 to date. The fees associated
with the equity component of the 10% convertible debentures, being $25,760, have
been charged to contributed surplus. The remaining amount, which has been
recorded as a reduction of the debenture principal, is being amortized over the
life of the 10% convertible debentures, unless the debentures are converted. If
converted, the pro rata portion of the financing fees associated with the
converted debentures is charged to capital in excess of par value. During 1998,
$21,117 has been charged to capital in excess of par value relating to $210,000
of convertible debentures which were converted.
The Company is currently in the process of filing a form SB-2 Registration
Statement qualifying the shares to be issued on conversion of the debentures
with the Securities and Exchange Commission. Should the registration statement
not be declared effective within 90 days of initial funding, a charge of 0.986%
per day will apply against the initial amount funded. Should successful
registration not occur within 120 days of initial funding, a charge of 0.1644%
per day will apply for each day thereafter. As of June 11, 1999, the SB-2
Registration Statement has not been declared effective. The initial amount
funded on October 1, 1998 was $200,000. An amount of $22,029 has been accrued
for the penalty of late filing of the registration statement.
8. LOSS PER SHARE
Loss per common share is loss for the period divided by the weighted average
number of common shares outstanding. The effect on earnings per share of the
exercise of options and warrants, and the conversion of the convertible
debentures is anti-dilutive.
9. INCOME TAXES
The income tax benefit differs from the amount computed by applying the U.S.
federal statutory tax rates to the loss before income taxes for the following
reasons:
MARCH 31, DECEMBER 31,
1999 1998 DECEMBER 31, 1997
$ $ $
---------- ---------- ---------
(34%) (35%) (34%)
Income tax benefit at U.S. statutory rate. . (408,675) (361,430) (46,530)
Increase (decrease) in taxes resulting from:
Deferred tax asset valuation allowance . . . 328,700 458,435 46,530
Non-deductible expenses. . . . . . . . . . . 141,663 - -
Foreign tax rate differences . . . . . . . . (61,688) (97,005) -
Income tax benefit . . . . . . . . . . . . . - - -
For financial reporting purposes, loss before income taxes includes the
following components:
MARCH 31, MARCH 31,
1999 1998 DECEMBER 31, 1997
$ $ $
------------ ------------ ----------
Pre-tax loss:
United States (621,139) (62,607) (136,854)
Foreign . . . (580,846) (970,051) -
(1,201,985) (1,032,658) (136,854)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets are as follows:
MARCH 31, DECEMBER 31, DECEMBER 31,
1999 1998 1997
$ $ $
------------ ---------- ---------
Deferred tax assets:
Net operating loss carryforwards 1,025,208 26,780 -
Start-up costs . . . . . . . . . 35,673 68,195 46,333
Depreciation . . . . . . . . . . 11,294 247 197
Debt issue costs . . . . . . . . 3,630 - -
Software costs . . . . . . . . . 405,597 409,743 -
Total deferred tax assets. . . . . 1,481,402 504,965 46,530
- ---------------------------------- ------------ ---------- ---------
Valuation allowance. . . . . . . . (1,481,402) (504,965) (46,530)
Net deferred tax assets. . . . . . - - -
- ---------------------------------- ------------ ---------- ---------
The Company has provided a valuation allowance for the full amount of deferred
tax assets in light of its history of operating losses since its inception.
The Company has U.S. operating losses carried forward of $1,144,000 which expire
as follows:
$
--------
2018 936,000
2019 208,000
The availability of these loss carryforwards to reduce future taxable income
could be subject to limitations under the Internal Revenue Code of 1986, as
amended. Certain ownership changes can significantly limit the utilization of
net operating loss carryforwards in the period following the ownership change.
The Company has not determined whether such changes have occurred and the effect
such changes could have on its ability to carry forward all or some of the U.S.
net operating losses.
The Company has non-capital losses carried forward for Canadian income tax
purposes of $1,523,000. These losses expire as follows:
$
2003 45,000
2004 7,000
2005 897,000
2006 574,000
10. COMMITMENTS
The Company is committed to the following minimum lease payments under operating
leases for premises and equipment:
$
Remainder of 1999. 88,623
2000 118,164
2001 100,667
2002 100,384
2003 and hereafter 835,567
11. CAPITAL LEASE OBLIGATIONS PAYABLE
The future minimum lease payments at March 31, 1999 under
capital leases are as follows:
CAPITAL LEASES
1999 . . . . . . . . . . . . . . . . . . . . . . . . 4,463
2000 . . . . . . . . . . . . . . . .. . . . . . 5,950
2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,950
2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,950
2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,950
2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,463
Total future minimum lease payments. . . . . . . . . . . . 32,726
Less: imputed interest . . . . . . . . . . . . . . . . . . (7,632)
Balance of obligations under capital lease . . . . . . . 25,094
- ----------------------------------------------------- ---------------
Less: current portion included in accounts payable and
accrued liabilities (5,950)
Long term obligation under capital lease . . . . . . . . . . . 19,144
12. NET CHANGE IN NON-CASH WORKING CAPITAL
MARCH 31, MARCH 31,
1999 1998 DECEMBER 31, DECEMBER 31,
$ $1998 1997
- ---------------------------------------
Accounts receivable . . . . . . . . . . (17,495) - (7,243) -
Due from related parties. . . . . . . . 2,410 - (13,118) -
Prepaid expenses and deposits . . . . . 26,520 (4,411) (132,956) (7,500)
Accounts payable. . . . . . . . . . . . 346,839 22,602 346,744 32,976
Accrued liabilities . . . . . . . . . . 125,404 - 48,880 -
Due to related parties. . . . . . . . . 5,189 - 197,115 -
Change relating to operating activities 488,867 18,191 439,422 25,476
13. SEGMENTED INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to the development and sale of encryption software. These
activities are planned to be carried out in Canada and the United States. To
date, all the activities have occurred in Canada.
14. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, amounts due from
related parties, deposits, accounts payable and accrued liabilities, amounts due
to related parties, capital lease obligations, and amounts due to stockholders
approximate their fair value. It is management's opinion that the Company is
not exposed to significant currency or credit risks arising from these financial
instruments.
The estimated fair value as at March 31, 1999 of the 10% convertible debentures
is $432,587 (December 31, 1998 - $189,000). This is based on the estimated
present value of the principal and interest of the debenture plus the estimated
fair value of the conversion option (exclusive of the intrinsic value of the
conversion option and the detachable warrants at the issue date of the
debenture). The carrying amount of the 10% convertible debentures is $632,664
(December 31, 1998 -$212,285).
The Company is subject to cash flow risk to the extent of the fixed 10% simple
interest rate being charged on the convertible debentures. The effective annual
interest rate realized by the Company, exclusive of the amounts relating to the
conversion feature of the 10% convertible debentures and the warrants, was 10%
(December 31, 1998 - 10%).
15. RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities." The Company does not acquire derivatives or engage in
hedging activities.
F - 19
CONTINGENCIES
- -------------
During the three month period ended March 31, 1999, a statement of claim has
been filed against the Company in the amount of approximately $27,529 ($41,580
Canadian) plus costs. The statement of claim seeks loss of compensation
relating to services provided to the Company. Management has placed $14,566
($22,000 Canadian) in trust with legal counsel to cover the claim. These
financial statements contain a provision for loss of $14,566 ($22,000 Canadian)
related to the claim.
17. SUBSEQUENT EVENTS
(a) On April 16, 1999, the Company drew down an additional $600,000 of
financing under the 10% convertible debenture agreement, which can be converted
into common stock at a fixed rate of $0.65 per common share.
On April 27, 1999, the debenture agreement was amended to include (among others)
the following changes:
(i) the total amount available under the debenture agreement was increased
from $2,000,000 to $5,000,000.
(ii) the financing fee applicable to the additional $3,000,000 available was
set at 8% of the principal sum issued.
(iii) the balance of the financing not yet drawn, $3,480,000, has conversion
prices ranging from $0.28 to $0.65 per common share.
(iv) an additional 923,077 share purchase warrants were issued, which give
the holder the right to purchase one common share for each warrant held, at a
price of $0.65 per warrant.
(b) During 1998, the Company had entered into a Put Option agreement with an
investor which allowed the Company to require the investor to purchase up to
25,000,000 shares of the common stock of the Company. In addition, the investor
was to be granted warrants to purchase up to 3,000,000 shares of common stock.
On April 26, 1999, the Company and the investor agreed to cancel the agreement
in exchange for warrants to the investor to purchase up to 1,000,000 shares of
common stock at an exercise price of $0.70 per share. The warrants expire April
15, 2002.
<PAGE>
MARCH 31, 1999
COST ACCUMULATED DEPRECIATION NET BOOK VALUE
----
Furniture and fixtures 108,942 9,781 99,161
- ------------------------
Computer hardware 83,689 10,661 73,028
Computer software for internal use 13,819 2,061 11,758
Leasehold improvements 98,942 2,473 96,469
Office equipment 25,094 - 25,094
330,486 24,976 305,510
DECEMBER 31, 1998
-----------------
COST ACCUMULATED DEPRECIATION NET BOOK VALUE
----
28
--
Furniture and fixtures 31,758 6,482 25,276
Computer hardware 45,631 5,534 40,097
Computer software for internal use 13,162 1,445 11,717
90,551 13,461 77,090
<PAGE>
5. SHARE CAPITAL
AUTHORIZED
20,000,000 common shares at $0.001 par value
5,000,000 preferred shares at $0.001 par value
COMMON STOCK ISSUED
During 1998, the 400,000 restricted common shares issued for services relate to
services provided by two consultants in relation to the establishment of the
capital structure of the Company. The shares were recorded at their estimated
fair value of $200,000.
COMMON STOCK HELD IN ESCROW
Upon entering into the 10% convertible debenture agreement (see note 7) the
Company placed 9,500,000 shares in escrow relating to the $2 million of
financing. In addition, 1,071,429 shares and 357,143 shares were placed in
escrow relating to the purchasers' and agent's warrants issued in relation to
the 10% convertible debenture agreement.
OPTIONS
As at March 31, 1999, the Company has issued 2,007,000 options to purchase
common stock to the Company's directors, officers and employees. Of the total
issued, none have been exercised as at March 31, 1999. Details of the stock
options outstanding at March 31, 1999 are as follows:
NUMBER OF OPTIONS EXERCISE PRICE EXPIRY DATE
----------------- -------------- -----------
200,000 0.15 February 22, 2008
32,000 0.15 June 30, 2008
35,000 0.32 June 30, 2008
81,000 0.33 June 30, 2008
143,000 0.37 June 30, 2008
22,000 0.40 June 30, 2008
80,000 0.44 June 30, 2008
1,106,500 0.48 June 30, 2008
82,500 0.58 June 30, 2008
71,000 0.62 June 30, 2008
10,000 0.65 June 30, 2008
36,000 0.69 June 30, 2008
33,000 0.75 June 30, 2008
75,000 0.77 June 30, 2008
2,007,000
- ---------
The Company applies Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees", and related interpretations in accounting for its
stock option plans. The fair value of each option granted to date is estimated
on the date of grant using the Black-Scholes option-pricing model with the
following assumptions: expected volatility of 153%; risk-free interest rate of
4.0%; no payment of common share dividends; and expected life of 10 years. Had
compensation cost for these plans been determined based upon the fair value at
grant date, consistent with the methodology prescribed in Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based compensation," the
Company's loss and loss per common share for the period end MARCH 31,
DECEMBER 31,
1999 1998
$ $
- -
DUE FROM RELATED PARTIES
Futurelink Distribution Corp. 10,708 9,073
Futurelink/Sysgold Ltd. - 4,045
10,708 13,118
DUE TO RELATED PARTIES
Officers and stockholders 67,202 43,588
Futurelink Distribution Corp. - 32,175
Willson Stationers Ltd. 2,601 1,352
Directors 132,501 120,000
202,304 197,115
DUE TO STOCKHOLDERS
Bankton Financial Corporation 15,628 15,775
Cameron Chell 1,986 1,957
Hampton Park Ltd. 4,045 56,985
21,659 74,717
<PAGE>
During the year ended December 31, 1998, the Company incurred $76,612 in fees
associated with computer services provided by Futurelink Distribution Corp., an
entity of which certain directors are also directors of the Company. An amount
of $32,175 was owed to Futurelink Distribution Corp. as at December 31, 1998.
There were no similar fees incurred during the period ended March 31, 1999 and
no amounts are owed to Futurelink Distribution Corp. as at March 31, 1999. The
Company provided sales to Futurelink Distribution Corp. during the period ended
March 31, 1999 in the amount of $1,175 (December 31, 1998 - $9,073), all of
which is included in the amounts due from related parties at March 31, 1999.
The fees charged by and sales provided to Futurelink Distribution Corp. are
recorded at their exchange amounts.
During the year ended December 31, 1998, the Company provided services of $4,045
to Futurelink Sysgold Ltd., an entity of which certain directors are also
directors of the Company. This amount was included in due from related parties
at December 31, 1999. These services are provided on normal commercial terms and
conditions. No services were provided to Futurelink Sysgold Ltd. During the
period ended March 31, 1999.
Office and administration expenses include $2,563 (December 31, 1998 - $8,035)
paid to Willson Stationers Ltd., an entity of which certain directors are also
directors and officers of the Company. An amount of $2,601 (December 31, 1998 -
$1,352) is owed to Willson Stationers Ltd. As at March 31, 1999. These
transactions are recorded at the exchange amount.
The amounts due to stockholders represent advances received by the Company. The
amount due to Hampton Park Ltd., a company owned by a stockholder, bears
interest at 8% per annum and has no set repayment terms. The remaining amounts
due to stockholders do not carry interest and have no set repayment terms. In
relation to these amounts, stockholders have indicated they do not intend to
demand repayment within the next year.
The Company entered into an agreement to lease premises from a stockholder. The
lease began on November 1, 1998 and is for a five year term. The minimum rent
is $9.27 per square foot per annum with 9,920 square feet of net rentable area.
Additional rent is estimated at $3.97 per square foot of net rentable area per
annum.
<PAGE>
7. CONVERTIBLE DEBENTURES
DECEMBER 31
MARCH 31, 1999 1998
$ $
- -
PRINCIPAL
Net balance outstanding, beginning of period 146,606 -
Funds advanced to date 500,000 420,000
Debentures converted during the year - (210,000)
646,606 210,000
FINANCING FEES
Fees paid on funds advanced to date (50,000) (42,000)
Intrinsic value associated with equity component of debentures 14,000
11,760
Fees paid through issuance of warrants to agent - (85,714)
Intrinsic value associated with equity component of debentures - 24,000
Amortization of financing fees to date 8,113 5,158
Financing fees associated with debentures converted to date - 21,117
(27,887) (65,679)
INTEREST EXPENSE
Accrued interest expense 13,945 2,285
NET BALANCE OUTSTANDING, END OF PERIOD 632,664 146,606
MARCH 31, DECEMBER 31,
1999 1998
On September 25, 1998 the Company entered into an agreement to issue 10%
- --------------------------------------------------------------------------------
convertible debentures in series of $200,000 up to a total of $2,000,000,
- --------------------------------------------------------------------------------
subject to the Company meeting certain conditions, which mature on October 31,
- --------------------------------------------------------------------------------
2001. The holders have the right to convert the debentures in increments of at
- --------------------------------------------------------------------------------
least $100,000, at a price equal to the lower of $0.28 and 78% of the average
- --------------------------------------------------------------------------------
closing bid price of the Company's common stock for the three trading days
- --------------------------------------------------------------------------------
immediately preceding the Notice of Conversion served on the Company. For the
- --------------------------------------------------------------------------------
$500,000 of convertible debentures that were issued on January 26, 1999,
- --------------------------------------------------------------------------------
$250,000 of debentures can be converted at a fixed price of $0.40 per common
- --------------------------------------------------------------------------------
share and the remaining $250,000 can be converted into shares at a fixed rate of
- --------------------------------------------------------------------------------
$ $
- -
Income tax benefit at U.S. statutory rate (34%) (1,045,938)
Increase (decrease) in taxes resulting from:
Deferred tax asset valuation allowance 1,106,172
Non-deductible expenses 128,162
Foreign tax rate differences (188,396)
Income tax benefit -
For financial reporting purposes, loss before income taxes includes the
following components:
MARCH 31, DECEMBER 31,
1999 1998
$ $
- -
Pre-tax loss:
United States (1,302,313)
Foreign (1,773,974)
(3,076,287)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The components of the
Company's deferred tax assets are as follows:
<PAGE>
MARCH 31, DECEMBER 31,
1999 1998
$ $
- -
Deferred tax assets:
Net operating loss carryforwards 697,768
Start-up costs 37,999
Depreciation 5,807
Organization costs 394
Debt issue costs 5,137
Software costs 405,597
Total deferred tax assets 1,152,702
- ---------------------------- ---------
Valuation allowance (1,152,702)
Net deferred tax assets -
- -------------------------- -
The Company has provided a valuation allowance for the full amount of deferred
tax assets in light of its history of operating losses since its inception.
The Company has U.S. operating losses carried forward of $936,000 which expire
in 2018. The availability of these loss carryforwards to reduce future taxable
income could be subject to limitations under the Internal Revenue Code of 1986,
as amended. Certain ownership changes can significantly limit the utilization
of net operating loss carryforwards in the period following the ownership
change. The Company has not determined whether such changes have occurred and
the effect such changes could have on its ability to carry forward all or some
of the U.S. net operating losses.
The Company has non-capital losses carried forward for Canadian income tax
purposes of $935,000. These losses expire as follows:
$
-
2003 44,000
------
2004 7,000
2005 884,000
<PAGE>
10. COMMITMENTS
The Company is committed to the following minimum lease payments under operating
leases for premises and equipment:
$
Remainder of 1999 88,623
------
2000 118,164
2001 100,667
2002 100,384
2003 831,194
2004 4,463
11. CAPITAL LEASE OBLIGATIONS PAYABLE
The future minimum lease payments at March 31, 1999 under capital leases are as
follows:
CAPITAL LEASES
1999 4,463
---- -----
2000 5,950
2001 5,950
2002 5,950
2003 5,950
2004 4,463
Total future minimum lease payments 32,726
Less: imputed interest (7,632)
Balance of obligations under capital lease 25,094
------------------------------------------ ------
Less: current portion included in accounts payable and accrued liabilities
(5,950)
Long term obligation under capital lease 19,144
<PAGE>
12. NET CHANGE IN NON-CASH WORKING CAPITAL
MARCH 31, MARCH 31,
1999 1998
----
$ $
Accounts receivable (17,495) -
Due from related parties 2,410 -
Prepaid expenses and deposits 26,520 (4,411)
Accounts payable 221,467 22,602
Accrued liabilities 125,404 -
Due to related parties 5,189 -
Change relating to operating activities 363,495 18,191
13. SEGMENTED INFORMATION
The Company's activities are conducted in one operating segment with all
activities relating to the development and sale of encryption software. These
activities are carried out in two geographic segments, being Canada and the
United States.
MARCH 31, 1999
--------------
CANADA U.S. TOTAL
------
$ $ $
Revenue 3,047 - 3,047
Fixed assets and organization costs 305,510 1,595 307,105
DECEMBER 31, 1998
-----------------
CANADA U.S. TOTAL
------
$ $ $
Revenue 29,068 - 29,068
Fixed assets and organization costs 77,090 1,740 78,830
<PAGE>
14. FINANCIAL INSTRUMENTS
Financial instruments comprising cash, accounts receivable, amounts due from
related parties, deposits, accounts payable and accrued liabilities, amounts due
to related parties and amounts due to stockholders approximate their fair value.
It is management's opinion that the Company is not exposed to significant
currency or credit risks arising from these financial instruments.
The estimated fair value as at March 31, 1999 of the 10% convertible debentures
is $432,587. This is based on the estimated present value of the principal and
interest of the debenture plus the estimated fair value of the conversion option
(exclusive of the intrinsic value of the conversion option and the detachable
warrants at the issue date of the debenture). The carrying amount of the 10%
convertible debentures is $632,664.
The Company is subject to interest rate risk to the extent of the fixed 10%
simple interest rate being charged on the convertible debentures. The effective
annual interest rate realized by the Company, exclusive of the amounts booked
relating to the conversion feature of the 10% convertible debentures and the
warrants, was 10%.
The Company's sales during 1999 were derived primarily from three customers,
representing 67% of total sales, two of which are related parties, being
Futurelink Distribution Corp. and Futurelink Sysgold Ltd. (see note 6). Sales
to these two companies represent 48% of total sales.
15. RECENT PRONOUNCEMENTS
In June, 1998, the FASB issued SFAS No. 133, "Accounting for Derivatives and
Hedging Activities." The Company does not acquire derivatives or engage in
hedging activities.
16. CONTINGIENCIES
A statement of claim has been filed against the Company in the amount of
approximately $27,529 ($41,580 Canadian) plus costs. The statement of claim
seeks loss of compensation relating to services provided to the Company.
Management has placed $14,566 ($22,000 Canadian) in trust with legal counsel to
cover the claim. These financial statements contain a provision for loss of
$14,566 ($22,000 Canadian) related to the claims.
17. SUBSEQUENT EVENTS
(a) On April 16, 1999, the Company received an additional $600,000 of
financing under the 10% convertible debenture agreement.
(b) During 1998, the Company entered into a Put Option agreement with an
investor which allowed the Company to require the investor to purchase up to
25,000,000 shares of the common stock of the Company. In addition, the investor
was to be granted warrants to purchase up to 3,000,000 shares of common stock.
Subsequent to year end, the Company and the investor agreed to cancel the
agreement. In addition, on April 26, 1999, the Company entered into an
agreement to issue warrants to the investor to purchase up to 1,000,000 shares
of common stock at an exercise price of $0.70 per share. The warrants expire
April 15, 2002.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
JAWS
Indemnification of Directors and Officers
The registrant has the power to indemnify its directors and officers against
liability for certain acts pursuant to the laws of Nevada, being JAWS's state of
incorporation. In addition, under the Articles of Incorporation of JAWS, no
director, officer or agent is personally liable to the corporation or its
stockholders for monetary damages arising out of a breach of such person's
fiduciary duty to JAWS, unless such breach involves intentional misconduct,
fraud or a knowing violation of law.
Liability of Directors and Officers. No director or officer shall be personally
liable to the corporation or stockholders for monetary damages for any breach of
fiduciary duty by such person as a director or officer. Notwithstanding the
foregoing sentence, the director or officer shall be liable to the extent
provided by the applicable laws for acts or omissions which involve intentional
misconduct, fraud or a knowing violation of law.
The provisions hereof shall not apply to or have any effect on the liability or
alleged liability of any officer or director of the corporation for or with
respect to any acts or omissions of such person occurring prior to this
amendment. JAWS' Articles state that it may, in its sole discretion indemnify
and advance expenses to any person who incurs liability or expense by reason of
such person acting as a director, officer, employee or agent of JAWS, to the
fullest extent allowed by the Nevada General Corporation Law.
Section 78.7502 of the Nevada General Corporation Law provides that a
corporation may indemnify any person who was or is a party or is threatened to
be made a party to any threatened, pending or completed action or suit by or in
the right of the corporation to procure a judgment in its favor by reason of the
fact that he is or was a director, officer, employee or agent of the
corporation, against expenses, including amounts paid in settlement and
attorneys' fees actually and reasonably incurred by him in connection with the
defense or settlement of the action or suit if he acted in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation. Indemnification may not be made for any claim,
issue or matter as to which such a person has been adjudged by a court of
competent jurisdiction, after exhaustion of all appeals therefrom, to be liable
to the corporation or for amounts paid in settlement to the corporation, unless
and only to the extent that the court in which the action or suit was brought or
other court of competent jurisdiction determines upon application that in view
of all the circumstances of the case, the person is fairly and reasonably
entitled to indemnity for such expenses as the court deems proper.
To the extent that a director, officer, employee or agent of a corporation has
been successful on the merits or otherwise in defense of any action, suit or
proceeding described above, or in defense of any claim, issue or matter therein,
the corporation shall indemnify him against expenses, including attorneys' fees,
actually and reasonably incurred by him in connection with the defense.
The articles of incorporation of JAWS provide that JAWS will exercise, to the
extent permitted by law, its power of indemnification, and that the foregoing
right of indemnification shall not be exclusive of other rights to which a
person shall be entitled as a matter of law.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers and controlling persons of JAWS pursuant to
the foregoing provisions, or otherwise, JAWS has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable.
JAWS
JAWS's Articles state that it may, in its sole discretion indemnify and advance
expenses to any person who incurs liability or expense by reason of such person
acting as a director, officer, employee or agent of the Corporation, to the
fullest extent allowed by the Business Corporations Act (Alberta).
The Business Corporations Act (Alberta) provides that a corporation may
indemnify its current and former officers and directors against reasonable
expenses which, in each case, were incurred in connection with actions, suits,
or proceedings in which such persons are parties by reason of the fact that they
are or were an officer or director of the corporation, if: (i) they acted
honestly and in good faith; (ii) in the case of a criminal or administrative
proceeding, they had no reasonable cause to believe the conduct was unlawful.
Unless limited by its articles of incorporation, a corporation shall be required
to indemnify an officer or who was wholly successful in defense of a proceeding,
against reasonable attorneys' fees.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following tables sets forth the various expenses in connection with the sale
and distribution of the securities being registered, other than underwriting
discounts and commissions and non-accountable expense allowance. All of the
amounts shown are estimates, except the Securities and Exchange Commission
registration.
SECURITIES AND EXCHANGE COMMISSION REGISTRATION FEE. $ 3,810.17
ACCOUNTING FEES AND EXPENSES . . . . . . . . . . . . $ 10,000.00
PRINTING AND ENGRAVING EXPENSES. . . . . . . . . . . $ 5,000.00
TRANSFER AGENT AND REGISTRAR (FEES AND EXPENSES) . . $ 2,000.00
BLUE SKY FEES AND EXPENSES (INCLUDING COUNSEL FEES). $ 2,000.00
OTHER LEGAL FEES AND LEGAL EXPENSES. . . . . . . . . $120,000.00
MISCELLANEOUS EXPENSES . . . . . . . . . . . . . . . $ 7,189.83
-----------
TOTAL. . . . . . . . . . . . . . . . . . . . . . . . $150,000.00
-----------
ITEM 26. RECENT SALE OF UNREGISTERED SECURITIES.
The following securities have been sold by JAWS since JAWS' incorporation in
1997.
1. Offering Memorandum ("OM") dated February 14, 1997 with a Sticker Update
dated April 1, 1997 pursuant to which JAWS sold 4,000,000 shares of Common Stock
at $0.015 per share for an aggregate investment of $60,000. The Offering was
made pursuant to an exemption provided by Rule 504 of Regulation D promulgated
under the Securities Act of 1933, as amended (the "Act"). The sale of shares
was to 14 investors in the state of Nevada and 27 additional investors, all of
which purchases took place outside the United States.
2. Issuances to two consultants to JAWS for an aggregate of 300,000 shares
of common stock issued December 1997 (250,000 shares) and in February 1998
(50,000 shares) in consideration for consulting services rendered to JAWS. The
issuances were made pursuant to an exemption provided by Rule 506 of Regulation
D under the Act.
3. Share Exchange Agreement between JAWS and shareholders of JAWS Canada
dated February 10, 1998 pursuant to which JAWS issued 1,500,000 shares of Common
Stock and options to purchase 400,000 shares of Common Stock at $0.50 per share
to the shareholders of JAWS Canada in exchange for all of the issued and
outstanding shares of JAWS Canada .
4. OM dated February 18, 1998 (the "February OM") pursuant to which JAWS
sold 600,000 shares of common stock at $0.50 per share for an aggregate
investment of $300,000. The offering was made pursuant to an exemption provided
by Rule 504 of Regulation D promulgated under the Act. The sale of shares was
to 26 investors.
5. Sale pursuant to the February OM of 1,250,000 shares of common stock of
JAWS at $0.40 per share for an aggregate investment of $500,000 to Bristol Asset
Management LLC. The offering was made pursuant to an exemption provided by Rule
504 of Regulation D promulgated under the Act.
Sale pursuant to the February OM of 900,000 shares of common stock of JAWS at
$0.20 per share for an aggregate investment of $180,000 to two investors
(450,000 shares each) Hampton Park Ltd. and Linear Strategies Ltd. The offering
was made pursuant to an exemption provided by Rule 504 of Regulation D
promulgated under the Act.
Sale pursuant to an OM dated April 1998, of 50,000 shares of common stock of
JAWS at $0.40 per share for an aggregate investment of $20,000. The Offering
was made pursuant to an exemption provided by Rule 504 of Regulation D
promulgated under the Act.
8. Issuance on July 24, 1998 of 100,000 shares of common stock of JAWS to
Bonanza Management Ltd. in consideration of services rendered. The issuance was
made pursuant to an exemption provided by Rule 506 of Regulation D under the
Act.
9. 10% Convertible Debenture issued to Thomson Kernaghan in connection with
the amended debenture purchase agreement dated April 27, 1999. To date, JAWS
has issued debentures for $1,520,000. Of such issuance only $210,000, plus
interest, has been noticed for conversion at $0.1118 into 1,912,317 shares of
common stock. The sale of the debenture was made pursuant to an exemption
provided by Regulation S promulgated under the Act. TK warranted in the
debenture purchase agreement that it is not a "U.S. Person", as such term is
defined in Rule 902(o) of Regulation S, that the securities have not been
offered to it in the United States and that offers of securities of the Company
shall not be made to United States persons for a period of one year from the
date of closing of all debentures offered pursuant to the agreement.
10. Sale on April 6, 1999 pursuant to the February OM of 1,571,428 of common
stock of JAWS at $0.35 per share for an aggregate investment of $550,000 to
Hampton Park Ltd. ($300,000) and Global Equity Fund Ltd. ($250,000). The
offering was made pursuant to an exemption provided by Rule 504 of Regulation D
promulgated under the Act. The purchasers are contractually prohibited from
transferring the securities for a six-month period.
11. Sale on December 15, 1998 of 1,182,188 shares of common stock of JAWS at
$0.32 per share for an aggregate investment of $378,300. Further, the sale
included, 391,094 warrants to purchase 391,094 common stock of JAWS at $1.00 per
share until March 30, 2000, and 391,094 warrants to purchase 391,094 common
shares at $2.00 per share until March 30, 2000. The offering was made pursuant
to an exemption provided by Regulation D (Rule 506) promulgated under the Act.
The sale of shares was to 9 investors. All investors are not "U.S. Persons" as
such term is defined in Rule 902(o) of Regulation S.
12. Sale on June 9, 1999 of 408,333 shares of common stock of JAWS at $0.60
per share for an aggregate investment of $245,000 to Royale Crown Limited. The
sale was made pursuant to an exemption as provided by Regulation D promulgated
under the Act.
13. Sale to Glentel Inc., on June 21, 1999, of 1,000,000 shares of common
stock of JAWS at $1.50 per share for an aggregate investment of $1,500,000.
This sale included 834,000 warrants to purchase 834,000 common shares at $2.25
per share until June 30, 2001. The sale was made pursuant to an exemption
provided by Regulation D, (Rule 506) promulgated under the Act and All investors
are not "U.S. Persons" as such term is defined in Rule 902(o) of Regulation D.
14. Sale on June 21, 1999 of 200,000 shares of common stock of JAWS at $1.50
per share for an aggregate investment of $300,000. This sale included 166,000
warrants to purchase 166,000 common shares at $ 2.25 until June 30, 2001, to 10
investors. All investors are not "U.S. Persons" as such term is defined in Rule
902(o) of Regulation S. The sale was made pursuant to an exemption provided by
Regulation D (Rule 506) promulgated under the Act.
ITEM 27. EXHIBITS.
(a) Exhibits
The following exhibits pursuant to Rule 601 of Regulation SB are included
herein.
3.1.1 Articles of Incorporation of "E-Biz" Solutions, Inc. (now JAWS US), a
Nevada Corporation as amended on March 11, 1998 and on February 4, 1999. (1)
3.1.2 Articles of Incorporation of JAWS Canada dated September 17, 1997.(1)
3.1.3 Certificate of Amendment of Articles of Incorporation, dated March 30,
1998, changing the name of E-Biz to Jaws Technologies, Inc.(1)
3.1.4 Certificate of Amendment of Articles of Incorporation of JAWS
increasing the total number of Common Stock which JAWS is allowed to issue from
20,000,000 to 95,000,000.(2)
3.2.1 Bylaws of E-Biz Solutions Inc. (now Jaws US) dated January 27,
1997.(1)
3.2.2 Bylaws No. 1 of JAWS Canada dated October 20, 1997 and Bylaw No. 2 of
JAWS Canada dated October 20, 1997.(2)
4.1.1 Amendment No. 1 to Debenture Purchase Agreement by and between JAWS
and Thompson Kernaghan dated April 27, 1999.(3)
4.1.2 Investment Agreement by and between JAWS and Bristol Asset Management
V, LLC dated August 27, 1998 and letter of termination thereto.(1)
4.1.3 Warrant to purchase 1,000,000 shares of common stock of JAWS issued to
Bristol Asset Management, LLC.(1)
4.1.4 Debenture Acquisition Agreement by and between JAWS and Thomson
Kernaghan & Co. Ltd. dated September 25, 1998.(1)
5.1.1 Opinion of Sonfield & Sonfield.(3)
10.1.1 Lease Agreement by and between JAWS and The Manufacturer of Life
Insurance Company dated December 15, 1997.(1)(Deleted)
10.1.2 Director's Agreement between JAWS and Arthur Wong dated July 1998.(1)
10.1.3 Director's Agreement between JAWS and Julia Johnson dated July 30,
1998.(1)
10.1.4 Incentive and Non-Qualified Stock Option Plan for JAWS.(1)
10.1.5 Master Agreement by and between JAWS and A.I. Axion Internet
Communications, Inc. dated November 24, 1998.(2)
10.1.6 Master Agreement by and between JAWS and Calgary On-Line dated
December 1998.(2)
10.1.7 Master Agreement by and between JAWS and ABC Internet Inc. dated
December 7, 1998.(2)
10.1.8 Written Consent of the Board of Directors authorizing payment of
consulting fees to officers of JAWS and their affiliates.(1)
10.1.9 Indemnity Agreements by and between JAWS and Ms. Julia L.
Johnson.(2)
10.1.10 Indemnity Agreements by and between JAWS and Mr. Arthur Wong.(2)
10.1.11 Agreement with FutureLink Distribution Corp.(2)
11 Statement re computation of per share earnings.(2)
15 Letter on unaudited interim financial information.(2)
21 Subsidiaries of JAWS: JAWS Technologies, Inc., an Alberta
corporation.(3)
23.1 Consent of Sonfield & Sonfield.(3)
23.2 Consent of Ernst & Young LLP.(3)
24 Power of Attorney (included in Part II).(3)
27 Financial Data Schedule(1)
- -------------------------
(1) Previously Filed.
(2) To be filed by amendment.
(3) Filed herewith.
ITEM 28. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any Prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the Prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually, or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement; notwithstanding the fore-going, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum Offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) (Section 230.424(b) of this
Chapter) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate Offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
Offering of such securities at that time shall be deemed to be the initial bona
fide Offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered that remain unsold at the termination of the
Offering.
Insofar as indemnification for liabilities arising from the Securities Act
of 1933 (the "Act") may be permitted to directors, officers, and controlling
persons of JAWS pursuant to the foregoing provisions, or otherwise, JAWS has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by JAWS of expenses incurred or paid by
a director, officer or controlling person of JAWS in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, JAWS
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, JAWS has duly
caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Calgary, Province of
Alberta on the 6th day of August, 1999.
JAWS TECHNOLOGIES INC.
By: /s/ ROBERT KUBBERNUS
------------------------
Robert Kubbernus, Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below constitutes and appoints Robert
Kubbernus or Cameron Chell, or either of them, his true and lawful
attorney-in-fact and agent, acting alone, with full powers of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments (including post-effective amendments)
to this registration statement, any Amendments thereto and any registration
statement for the same Offering which is effective upon filing pursuant to Rule
462(b) under the Securities Act of 1933, and to file the same, with all exhibits
thereto, and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, each acting
alone, full powers and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all said attorney-in-fact and agent, acting alone, or his substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed below by the following persons on behalf
of JAWS in the capacities and on the dates indicated.
SIGNATURE CAPACITY DATE
- -------------------- ------------------------------- --------------
/s/ ROBERT KUBBERNUS CEO and Director August 6, 1999
- --------------------
Robert Kubbernus
/s/ CAMERON B. CHELL Director/Vice President Finance August 6, 1999
- --------------------
Cameron B. Chell
/s/ JULIA L. JOHNSON Director August 6, 1999
- --------------------
Julia L Johnson
/s/ ARTHUR WONG. . . Director August 6, 1999
- --------------------
Arthur Wong
/s/ VERA GMITTER . . Vice President Operations August 6, 1999
- --------------------
Vera Gmitter
/s/ TEJ MINHAS . . . Vice President Technology August 6, 1999
- --------------------
Tej Minhas
<PAGE>
EXHIBITS
The following exhibits pursuant to Rule 601 of Regulation SB are included
herein.
3.1.1 Articles of Incorporation of "E-Biz" Solutions, Inc. (now JAWS US), a
Nevada Corporation as amended on March 11, 1998 and on February 4, 1999. (1)
3.1.2 Articles of Incorporation of JAWS Canada dated September 17, 1997.(1)
3.1.3 Certificate of Amendment of Articles of Incorporation, dated March 30,
1998, changing the name of E-Biz to Jaws Technologies, Inc.(1)
3.1.4 Certificate of Amendment of Articles of Incorporation of JAWS
increasing the total number of Common Stock which JAWS is allowed to issue from
20,000,000 to 95,000,000.(2)
3.2.1 Bylaws of E-Biz Solutions Inc. (now Jaws US) dated January 27,
1997.(1)
3.2.2 Bylaws No. 1 of JAWS Canada dated October 20, 1997 and Bylaw No. 2 of
JAWS Canada dated October 20, 1997.(2)
4.1.1 Amendment No. 1 to Debenture Purchase Agreement by and between JAWS
and Thompson Kernaghan dated April 27, 1999.(3)
4.1.2 Investment Agreement by and between JAWS and Bristol Asset Management
V, LLC dated August 27, 1998 and letter of termination thereto.(1)
4.1.3 Warrant to purchase 1,000,000 shares of common stock of JAWS issued to
Bristol Asset Management, LLC.(1)
4.1.4 Debenture Acquisition Agreement by and between JAWS and Thomson
Kernaghan & Co. Ltd. dated September 25, 1998.(1)
5.1.1 Opinion of Sonfield & Sonfield.(3)
10.1.1 Lease Agreement by and between JAWS and The Manufacturer of Life
Insurance Company dated December 15, 1997.(1)(Deleted)
10.1.2 Director's Agreement between JAWS and Arthur Wong dated July 1998.(1)
10.1.3 Director's Agreement between JAWS and Julia Johnson dated July 30,
1998.(1)
10.1.4 Incentive and Non-Qualified Stock Option Plan for JAWS.(1)
10.1.5 Master Agreement by and between JAWS and A.I. Axion Internet
Communications, Inc. dated November 24, 1998.(2)
10.1.6 Master Agreement by and between JAWS and Calgary On-Line dated
December 1998.(2)
10.1.7 Master Agreement by and between JAWS and ABC Internet Inc. dated
December 7, 1998.(2)
10.1.8 Written Consent of the Board of Directors authorizing payment of
consulting fees to officers of JAWS and their affiliates.(1)
10.1.9 Indemnity Agreements by and between JAWS and Ms. Julia L.
Johnson.(2)
10.1.10 Indemnity Agreements by and between JAWS and Mr. Arthur Wong.(2)
10.1.11 Agreement with FutureLink Distribution Corp.(2)
11 Statement re computation of per share earnings.(2)
15 Letter on unaudited interim financial information.(2)
21 Subsidiaries of JAWS: JAWS Technologies, Inc., an Alberta
corporation.(3)
23.1 Consent of Sonfield & Sonfield.(3)
23.2 Consent of Ernst & Young LLP.(3)
24 Power of Attorney (included in Part II).(3)
27 Financial Data Schedule(1)
- -------------------------
(1) Previously Filed.
(2) To be filed by amendment.
(3) Filed herewith.
<PAGE>
Exhibit 4.1.1 - Page 14
EXHIBIT 4.1.1
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION OR THE SECURITIES COMMISSION OF ANY STATE. THE SECURITIES
ARE BEING OFFERED PURSUANT TO A SAFE HARBOR FROM REGISTRATION UNDER REGULATION S
PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). THE
SECURITIES ARE "RESTRICTED" AND MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES
OR TO U.S. PERSONS (AS SUCH TERM IS DEFINED IN REGULATION S PROMULGATED UNDER
THE ACT) UNLESS THE SECURITIES ARE REGISTERED UNDER THE ACT, PURSUANT TO
REGULATION S OR PURSUANT TO AVAILABLE EXEMPTIONS FROM THE REGISTRATION
REQUIREMENTS OF THE ACT AND THE SELLER IS PROVIDED WITH OPINION OF COUNSEL OR
OTHER SUCH INFORMATION AS IT MAY REASONABLY REQUIRE TO CONFIRM THAT SUCH
EXEMPTIONS ARE AVAILABLE. FURTHER, HEDGING TRANSACTIONS INVOLVING THE SECURITIES
MAY BE MADE ONLY IN COMPLIANCE WITH THE ACT.
AMENDMENT NO. 1 TO
DEBENTURE PURCHASE AGREEMENT
THIS AMENDMENT NO. 1 TO DEBENTURE PURCHASE AGREEMENT (the "Agreement") is
made and entered into as of April 27, 1999, by and between JAWS TECHNOLOGIES
INC., a Nevada corporation ("Seller") and THOMSON KERNAGHAN & CO. LTD, an
Ontario corporation ("Buyer"), with respect to the following facts:
A. Buyer and Seller originally entered into a Debenture Acquisition
Agreement dated September 25, 1998 respecting a $2,000,000 10% Convertible
Debenture (the "Debenture"). To this date $1,520,000 has been drawn down (with
$210,000 thereof previously converted to common stock) leaving a balance of
$480,000. The parties desire to clarify conversion prices and other terms with
respect to the previously drawn down debentures and also to restate their terms
and intentions with respect to an additional $3,000,000 debenture facility, and
to restate the terms of portions of the convertible debentures previously drawn
down and still outstanding.
B. Seller desires to sell to the Buyer, and Buyer desires to purchase
from the Seller an aggregate of up to $5,000,000 of a 10% Convertible Debenture
(the "Debentures") of Seller in the form of Exhibit B and an aggregate of
$1,000,000 of Warrants of Seller in the forms of Exhibit A and Exhibit D hereto,
respectively, $600,000 of which may be converted at $0.28 per share and $400,000
of which may be converted at $0.65 per share (collectively, the "Securities"),
upon the terms and conditions as set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing facts and the mutual
covenants and agreements contained herein, the parties hereby agree as follows:
1. PURCHASE AND SALE OF SECURITIES. Seller hereby sells to the Buyer,
and Buyer hereby purchases the Securities from Seller on the terms and
conditions stated herein. Seller is acquiring the Securities as Nominee and
intends to resell the Securities outside the United States to certain of its
customers who are not U.S. persons.
2. PURCHASE PRICE. The total purchase price (the "Purchase Price") for
the Securities shall be up to Five Million Dollars ($5,000,000), payable in cash
in accordance with the terms, conditions and procedures set forth herein.
3. TRANSFER OF SECURITIES AND DELIVERY OF PURCHASE PRICE.
3.1 (a) As of September 25, 1998, ("Initial Funding Date"), the
Buyer purchased Two Hundred Thousand Dollars ($200,000) of Debentures and
Seller:
(i) Filed on an appropriate form with the United States Securities and
Exchange Commission (the "SEC") to register its Common Stock under Section 12(g)
of the Securities Exchange Act of 1934, as amended, and the registration
statement with the SEC under the Securities Act of 1933, as amended, as provided
for in Section 6 hereof, which registration statements contains the required
clean opinion on the financial statements of the Seller by Ernst & Young and was
reviewed by United States securities counsel for the Seller, Jeffer, Mangels,
Butler & Marmaro LLP; and
(ii) Provided on the opinion of the Seller's counsel, Jeffer, Mangels,
Butler and Marmaro, LLP to the effect that the Seller is duly incorporated and
has the corporate power to enter into this Agreement and the Exhibits thereto,
that this Agreement and the Exhibits thereto that have been entered into as of
the Initial Closing Date have been duly approved by all necessary action on
behalf of the Seller and this Agreement and such Exhibits are binding agreements
effective according to their respective terms except for bankruptcy and
equitable principal.
The amount advanced was represented by a Debenture in the form of Exhibit B
hereto for the amount advanced. The Seller also delivered to the Buyer on the
Initial Funding Date, Warrants for the purchase of 1,071,429 shares of Common
Stock in the form of Exhibit A hereto.
(b) After the Initial Funding Date, one or more Subsequent Funding
Dates occurred in which the Buyer purchased an additional One Million Three
Hundred Twenty Thousand Dollars ($1,320,000) of Debentures.
3.2 (a) On the Initial Funding Date, Seller (i) paid a finance fee
to the Buyer, in an amount equal to ten percent (10 %) of the Principal Sum (as
defined in the Debenture) funded on the Initial Funding Date, (ii) paid Buyer's
reasonable attorney's fees and costs incurred in entering into this Agreement,
(but not more than $10,000) against detailed invoices, and (iii) issued to the
Buyer, for Buyer's own account, $100,000 of Warrants of the Seller exercisable
at a per share price equal to the average of the closing bid prices of the
Common Stock of the Seller as quoted on the NASD Electronic Bulletin Board for
the three trading days prior to the Initial Funding Date, Twenty-Eight Cents
($0.28), in the form of Exhibit D hereto (the "Buyer Warrants"). For each
funding following the Initial Funding Date and until $2,000,000 has been drawn
upon, Seller shall pay a finance fee in an amount equal to ten percent (10%) of
the sum funded on such date.
(b) Upon the first funding following the filing of Amendment No. 2 of
the Seller's SB-2 Registration Statement ("Amendment No. 2 Funding Date"),
Seller shall issue Warrants in the form of Exhibit A hereto for $600,000 of
Common Stock at an exercise price equal to sixty five cents ($0.65) per share
and shall pay to the Buyer, for Buyer's own account, Buyer's reasonable
attorney's fees and costs incurred in entering into this Agreement (but not more
than $10,000) against detailed invoices.
3.3 For each funding following a draw down of the initial Two Million
Dollars ($2,000,000) contemplated in the Debenture, the Seller shall pay a
finance fee to the Buyer, in an amount equal to eight percent (8 %) of the sum
that is funded, thirty-seven point five percent (37.5 %) of which may be paid by
the issuance of shares of Common Stock which may subsequently be resold pursuant
to an exemption under Rule 144. Such shares shall be issued at a value of
seventy-eight percent (78 %) of the average closing price for the three days
preceding the funding date on the particular financing or another conversion
price determined by the parties for such funding.
3.4 On the Initial Funding Date, the Seller and Buyer entered into the
Escrow Agreement in the form of Exhibit C hereto, with the Buyer as Escrow
Agent.
3.5 On each Amendment No. 2 Funding Date for all advances in excess of
the Two Hundred Thousand Dollars ($200,000) referred to in Section 3. 1 (a) and
the $720, 000 referred to in Section 3. 1 (b) additional funding shall be
provided up to an aggregate total of Five Million Dollars ($5,000,000). For the
Six Hundred Thousand Dollars ($600,000) advanced on April 19, 1999, the
conversion price to be reflected in the Convertible Debenture shall be sixty
five cents ($0.65) per share. With respect to any purchases of the remaining
$3,480,000, the conversion price shall be a fixed forty cents ($0.40) per share,
unless the parties agree to a higher conversion price prior to the issuance of a
debenture.
(a) An Amendment No. 2 Funding Date will occur on the 30th day (or the
next business day if such 30th day is not a Business Day as defined in the form
of debenture) after the Buyer receives a written request from the Seller to
advance additional funds with such written request being sent by facsimile to
the Buyer followed up in writing by over-night courier service;
(b) Notwithstanding any other provision hereof, the Buyer at a proposed
subsequent funding date is not required to advance any additional amounts to the
Seller if the Form 10 or Form I OSB Registration Statement described in Section
3. 1 (a) hereof has not become effective under the Securities Exchange Act of
1934, as amended, and the Registration Statement under the Securities Act of
1933, as amended as provided for in Section 6 hereof has become effective.
4. REPRESENTATIONS AND WARRANTIES OF THE SELLER. The Seller hereby
represents and warrants to the Buyer as follows:
4.1 Any Common Stock of Seller issuable upon conversion of or as
payment of interest pursuant to the Debentures and the exercise of the Warrants
and the Buyer's Warrants, will be duly and validly issued fully paid and
nonassessable Common Stock of the Seller.
4.2 The Seller is a corporation duly organized, validly existing and in
good standing under the laws of the State of Nevada. The Seller has full
corporate power and authority to own and operate its properties and assets, and
to carry on its business as presently conducted and as proposed to be conducted.
The Seller is duly qualified to do business as a foreign corporation in each
jurisdiction in which the failure to be so qualified could have a material
adverse effect on the Seller. The Seller has furnished the Buyer or its special
counsel with true, correct and complete copies of its Articles of Incorporation
and By-laws, as amended, as in effect on the date hereof.
4.3 The Seller has and will have at each Amendment No. 2 Funding
Initial Date, all requisite legal and corporate power and authority to execute
and deliver this Agreement and the Exhibits hereto, to sell and issue the
Securities and the Buyer's Warrants and all Common Stock underlying the
Securities, the Buyer's Warrants, hereunder, and to carry out and perform its
obligations under the terms of this Agreement and the Exhibits hereto.
4.4 The authorized capital stock of the Seller consists of (a)
95,000,000 shares of Common Stock, par value $.001 per share, of which
10,612,317 were issued and outstanding as of March 31, 1999 and, (b) 5,000,000
shares of Preferred Stock, par value $-001 per share, none of which are issued
and outstanding immediately prior to the Initial Funding Date. Schedule 4.4(a)
sets forth a true and correct list of the current stockholders of the Seller
indicating the number of shares of each class of the Seller's stock held by each
such stockholder. Except as set forth on Schedule 4.4(b), the Seller does not
have any authorized or outstanding options, warrants, convertible debentures,
rights or other securities exercisable for or convertible into any capital stock
of any of the Seller. Except for rights granted under this Agreement, no person
is entitled to any preemptive right or right of first refusal or similar right
with respect to any issuance of capital stock or other securities by the Seller.
Except for the Seller's obligations under this Agreement, there are no
outstanding obligations of the Seller to redeem, purchase or otherwise acquire
capital stock or other securities of any corporation. Except as provided herein
no person has any right to require the Seller to register any shares of its
capital stock for sale pursuant to the Securities Act of 1933, as amended.
4.5 All corporate action on the part of the Seller, its directors and
stockholders necessary for the authorization, execution, delivery and
performance of this Agreement and the Exhibits hereto, the authorization, sale,
issuance and delivery of the Securities the Buyer's Warrants and all underlying
Common Stock and the performance of all of the Seller's obligations hereunder
and under each of the Exhibits hereto has been duly taken by the Seller. This
Agreement, when executed and delivered by the Seller, constitutes, and each of
the Exhibits thereto shall, when executed and delivered, constitute, a valid and
binding obligation of the Seller, enforceable in accordance with their terms
except for bankruptcy and equitable remedies. The Common Stock when issued in
compliance with the Securities and the Buyer's Warrants, shall be validly
issued, fully paid and non-assessable. The Securities and the Buyer's Warrants
are free of any liens claims or encumbrances; provided, however, that the will
be subject to restrictions on transfer under applicable state and/or federal
securities laws as set forth herein. The issuance of the Securities or Buyer's
Warrants will not be subject to any preemptive rights or rights of first
refusal, or result in any default of, or conflict with, the Articles of
Incorporation or Bylaws of the Seller, any contract or agreement to which the
Seller is a party or by which it is bound or any other obligation or commitment
of the Seller.
4.6 The Seller has delivered to the Buyer the audited balance sheet and
statements of operations and cash flows of the Seller as of and for the period
ended December 31, 1998 (the "Financial Statements"). The Financial Statements
are complete and correct and have been prepared in accordance with the books and
records of the Seller on a consistent basis. The Financial Statements accurately
set out, present fairly and describe the consolidated financial condition and
operating results of the Seller as of the dates, and during the periods,
indicated therein.
4.7 Except as set forth in Schedule 4.7 hereto, the Seller has no
liabilities or obligations of any kind, absolute, contingent or otherwise,
except (a) the liabilities and obligations set forth in the Financial
Statements, (b) liabilities with respect to equipment leases entered into in the
ordinary course of business, and (c) liabilities and obligations which have been
incurred subsequent to December 31, 1998, in the ordinary course of business and
consistent with past practice.
4.8 The Seller has good and marketable title to its properties and
assets, and has good title to all its leasehold interests, in each case subject
to no lien, claim or encumbrance other than (a) the lien of current taxes not
yet due and payable, (b) possible minor liens and encumbrances which do not in
any case or in the aggregate materially detract from the value of the property
subject thereto or materially impair the operations of the Seller, and which
have not arisen otherwise than in the ordinary course of business. The assets
and properties of the Seller are adequate to conduct the operations currently
conducted and proposed to be conducted by it. The Seller enjoys peaceful and
undisturbed possession under all leases under which it is operating, and all
said leases are valid and subsisting and in full force and effect. The leasehold
improvements of the Seller and all of their tangible personal property,
machinery, equipment, fixtures and inventories used in the ordinary course of
business are in good repair and in good operating condition, reasonable wear and
tear excluded.
4.9 The Seller is not in violation of any term of its Articles of
Incorporation or Bylaws, or of any material term or provision of any mortgage,
indebtedness, indenture, contract, agreement, instrument, judgment or decree,
including without limitation any Material Contract. The Seller is in compliance
with all judgments, decrees, governmental orders, laws, statutes, rules and
regulations by which it is bound or to which it or any of its properties or
assets is subject, except where the failure to comply would not have a material
adverse effect on the Seller. The Seller has all permits, licenses, franchises
and authorizations (collectively, the "Licenses") which are required by law
and/or necessary to operate its business as conducted or proposed to be
conducted, except where the failure to have any such License would not have a
material adverse effect on the Seller. All such Licenses were validly issued and
are in full force and effect. The Seller is in compliance in all material
respects with all of its Licenses and no suspension, revocation or termination
of any License is pending or, to the knowledge of the Seller, threatened. The
execution, delivery and performance of and compliance with this Agreement and
the Exhibits thereto, and the issuance of the Securities and the Buyer's
Warrants have not resulted and will not result in any violation of, or conflict
with, or constitute a material default under, (a) the Articles of Incorporation
or By-laws of the Seller or (b) assuming the accuracy of the representations and
warranties of the Seller set forth in hereto, any applicable law, statute, rule,
regulation or License, or (c) any agreement, contract, franchise or instrument
to which the Seller is a party, and has not resulted and will not result in the
creation of, any Lien upon any of the properties or assets of the Seller.
4.10 The Seller has good and marketable title to, or valid and
continuing rights and licenses to use, all patents, patent rights, trade
secrets, trademarks, trademark rights, service marks, trade names, copyrights,
franchises, licenses, permits, inventions, customer lists, and all rights with
respect to the foregoing, which are necessary for the operation of its business
as presently conducted and now proposed to be operated (collectively, with any
application with respect to the issuance or granting of any of the foregoing,
the "Intangible Property"). To the Seller's knowledge, the conduct of business
of the Seller as now operated and as now proposed to be operated does not and
will not conflict with any valid intellectual property right of others. The
Seller has not received any notice of any claim against it that any of its
operations, activities, products or publications infringes on any patent,
trademark, trade name, copyright or other property right of a third party, or
that it is illegally or otherwise using the trade secrets or any property rights
of others. The Seller has no knowledge that any licensor of it has any disputes
with or claims against any third party for infringement by such third party of
any trade name or other Intangible Property. Each employee of the Seller has
executed a confidentiality and non-disclosure agreement in favor of the Seller.
4.11 There are no actions, suits, proceedings or investigations pending
against the Seller or its properties before any court or governmental agency
(nor, to the best of the Seller's knowledge, is there any reasonable basis
therefore or threat thereof).
4.12 To the best of the Seller's knowledge, no employee of the Seller
is in violation of any term of any employment contract, patent disclosure
agreement or any other contract or agreement relating to the relationship of
such employee with the Seller.
4.13 All agreements material to the business of the Seller ("Material
Contracts") are valid, binding and in full force and effect in all material
respects. The Seller and, to the best of the Seller's knowledge, each other
party to a Material Contract have in all material respects performed all the
obligations required to be performed by them, have received no notice of default
and are not in default under any Material Contract.
4.14 The Seller (a) has accurately prepared and timely filed all tax
returns that are required to have been filed by it with all appropriate federal,
state, county and local governmental agencies (and all such returns fairly
reflect the Seller's operations for tax purposes); and (b) has paid in full or
made adequate provision on the Financial Statements for the payment of all
taxes.
4.15 None of this Agreement (including the Exhibits and Schedules
hereto), any instrument, certificate or report furnished to the Shareholder when
read together, contains any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
or therein, in light of the circumstances under which they are made, not
misleading. The Seller knows of no information or fact that has and/or could
have a material adverse effect on it that has not been disclosed to the Buyer in
writing.
4.16 The Seller represents that it has not offered the Securities to
the Subscriber in the U.S. or, to the best knowledge of the Seller, to any
person in the United States or any U.S. person (as defined in Regulation S
promulgated by the United States Securities and Exchange Commission).
4.17 To the best of the knowledge of the Seller, neither the Seller nor
any person acting for the Seller has conducted any "directed selling efforts" as
that term is defined in Rule 902 of Regulation S.
5. REPRESENTATIONS, WARRANTIES, COVENANTS AND AGREEMENTS OF THE BUYER.
The Buyer hereby represents and warrants to and covenants and agrees with the
Seller the following:
5.1 The Buyer represents and warrants to the Seller that (i) the Buyer
is not a "U.S. person" as that term is defined in Rule 902(o) of Regulation S;
(ii) the Securities and the Buyer's Warrants were not offered to the Buyer in
the United States and at the time of execution of this Agreement and of any
offer to buy the Securities and Buyer's Warrants hereunder the Buyer was
physically outside the United States; (iii) the Buyer is purchasing the
Securities and Buyer's Warrant for its own account and not on behalf of or for
the benefit of any U.S. person and the sale of the Securities has not been
prearranged with or on behalf of any buyer in the United States; (iv) the Buyer
and to the best knowledge of the Buyer each distributor, if any, participating
in the offering of the Securities and Buyer's Warrants, has agreed and the Buyer
hereby agrees that all offers and sales of the Securities and the Buyer's
Warrants prior to the expiration of a period commencing on the closing of all
the sale of all Debentures offered by this Agreement and ending one year
thereafter (the "Distribution Compliance Period") shall not be made to U.S.
persons or for the account or benefit of U.S. persons and shall otherwise be
made in compliance with the provisions of Regulation S. The Buyer is not a
dealer or underwriter with respect to this transaction and is a "distributor" as
defined in Regulation S.
5.2 The Purchase Price to be paid by Buyer to Seller for the Securities
and Buyer's Warrants has been determined by Buyer as fair and appropriate based
solely upon Buyer's independent investigation and due diligence of the Seller,
and neither the Seller nor any of its agents, including, without limitation, any
of their officers, directors, employees, accountants and attorneys, has made any
representations or warranties whatsoever in connection with the sale of the
Securities and Buyer's Warrants by the Seller to the Buyer, except as
specifically set forth herein. The Buyer has had sufficient opportunity in
connection with the sale of the Securities and Buyer's Warrants to review the
Seller's business and affairs (including, without limitation, the Seller's
financial statements and other information) and to inquire of the Seller's
management with respect thereto. The Buyer has had answered to its satisfaction
any questions with respect to the Seller's business and affairs. The Buyer
further has had the opportunity to obtain independent financial, legal,
accounting, business, tax and other appropriate advice with respect to the
transactions contemplated by this Agreement, and is not relying upon the Seller
or any of its agents in any manner in connection with same.
5.3 The certificates representing the Securities and the Buyer's
Warrants shall bear the first legend set forth on the first page of this
Agreement and any other legend, if such legend or legends are reasonably
required by the Seller to comply with state, federal or foreign law.
5.4 The Buyer understands and agrees with the Seller, that in the
absence of the registration of the Securities, the Buyer's Warrants and the
underlying Common Stock under the Act, the Securities, the Buyer's Warrants and
the underlying Common Stock may only be resold as provided for in Rules 903 or
904 of Regulation S, pursuant to a valid exemption from registration under the
Act, including sales under Rule 144. Rule 144, promulgated by the United States
Securities and Exchange Commission under the Act, may not be currently available
for sale of the Securities and Buyer's Warrants and underlying Common Stock in
the United States, and there is no assurance that it will be available at any
particular time in the future. Sales of Common Stock underlying the Securities
and the Buyer's Warrants may be made in reliance upon Rule 144 but only (i)
limited quantities after the completion of the Distribution Compliance Period
(for Common Stock underlying the Warrants, one year after exercise if latter),
or (ii) in unlimited quantities by non-affiliates after the first yearly
anniversary of the completion of the Distribution Compliance Period (for Common
Stock underlying the Warrants, two years after exercise if latter), in each case
in accordance with the conditions of the Rule, all of which must be met
(including the requirement, if applicable, that adequate information concerning
the Seller is then available to the public).
5.5 To the best of the knowledge of the Buyer and Seller neither the
Buyer nor any distributor, if any, participating in the offering of the
Securities and Buyer's Warrants nor any person acting for the Buyer or any such
distributor has conducted any "directed selling efforts" as that terms is
defined in Rule 902 of Regulation S.
5.6 The Buyer understands that the Securities, the Buyer's Warrants and
all underlying Common Stock have not been registered under the Act and are being
offered and sold pursuant to a "safe harbor" from registration contained in
Regulation S promulgated under the Act based in part upon the representations of
the Seller contained herein. The Seller has reviewed the terms of the Warrants
and the Buyer's Warrants and is aware of the restrictions on exercise of the
Warrants and the Buyer's Warrants by U.S. Persons, namely the following:
THE WARRANTS AND THE BUYER'S WARRANTS MAY ONLY BE EXERCISED (i) BY A PERSON
WHO IS NOT A U.S. PERSON (AS DEFINED IN REGULATION S PROMULGATED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED), (ii) IF NOT EXERCISED ON BEHALF OF A U.S.
PERSON, (iii) IF NO U.S. PERSON HAS ANY INTEREST IN THE WARRANTS OR BUYER'S
WARRANTS BEING EXERCISED OR THE UNDERLYING SECURITIES TO BE ISSUED UPON
EXERCISE, AND (1v) OUTSIDE THE UNITED STATES AND THE WARRANT SHARES UNDERLYING
THE WARRANTS AND THE BUYER'S WARRANTS ARE TO BE DELIVERED OUTSIDE THE UNITED
STATES. IF THE ABOVE CANNOT BE COMPLIED WITH, THEN THE WARRANTS AND THE BUYER'S
WARRANTS CAN BE EXERCISED ONLY IF A WRITTEN OPINION OF COUNSEL, THE FORM AND
SUBSTANCE OF WHICH IS ACCEPTABLE TO THE COMPANY, IS DELIVERED TO THE SELLER
PRIOR TO EXERCISE OF THE WARRANTS AND BUYER'S WARRANTS BEING EXERCISED THAT
REGISTRATION IS NOT REQUIRED, OR THE UNDERLYING SECURITIES DELIVERED UPON
EXERCISE HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933.
5.7 The Buyer knows of no public solicitation or advertisement of an
offer in connection with the proposed issuance and sale of the Securities and
the Buyer's Warrants, the Buyer's Warrants or any underlying Common Stock.
5.8 The Buyer is acquiring the Securities to be issued and sold
hereunder (and the Common Shares issuable thereunder) as a nominee (but is
acquiring the Buyer's Warrants (and the underlying Common Stock) for its own
account for investment and not as a nominee and not with a view to the
distribution thereof). The Buyer understands that it must bear the economic risk
of this investment indefinitely unless the sale of such Securities and Buyer's
Warrants and the underlying shares of Common Stock is registered pursuant to the
Act, or an exemption from such registration is available, and that the Buyer has
no present intention of registering any such sale of the Securities, the Buyer's
Warrants and any underlying Common Stock, except as otherwise specifically
provide for herein. The Buyer represents and warrants to the Seller that it has
no present plan or intention to sell any of such Securities, the Buyer's
Warrants and the underlying Common Stock in the United States or to a United
States person pursuant to any predetermined arrangements. The Buyer covenants
that neither it not its affiliates nor any person acting on its or their behalf
has the intention of entering or will enter during the Distribution Compliance
Period, into any put option, short position, hedging transactions, equity swaps
or other similar instrument or position with respect to any of such Securities,
the Buyer's Warrants and the underlying Common Stock or securities of the same
class as any of such Securities, the Buyer's Warrants and the underlying Common
Stock in violation of the Act and neither the Buyer nor any of its affiliates or
any person acting on its or their behalf will use at any time any of such
acquired pursuant to this Agreement to settle any put option, short position,
hedging transactions, equity swaps or other similar instrument or position that
may have been entered into prior to the execution of this Agreement in violation
of the Act.
5.9 The Buyer further covenants that it will not make any sale,
transfer or other disposition of the Securities and the Buyer's Warrants or any
underlying Common Stock in violation of the Act, the Securities and Exchange Act
of 1934, as amended (the "Exchange Act") or the rules and regulations of the
Securities and Exchange Commission (the "Commission") promulgated thereunder.
5.10 The Buyer has the full power and authority to execute, deliver and
perform this Agreement. This Agreement when executed and delivered by the Buyer
will constitute a valid and legally binding obligation of the Buyer, enforceable
in accordance with its terms except for bankruptcy and equitable remedies.
5.11 The Buyer has reviewed with his, her or its own tax advisors the
foreign, federal, state and local tax consequences of this investment, where
applicable, and the transactions contemplated by this Agreement. The Buyer is
relying solely on such advisors and not on any statements or representations of
the Seller or any of its agents and understands that the Buyer (and not the
Seller) shall be responsible for the Buyer's own tax liability that may arise as
a result of this investment or the transactions contemplated by this Agreement.
5.12 The Buyer acknowledges that it has had this Agreement and the
transactions contemplated by this Agreement reviewed by its own legal counsel.
The Buyer is relying solely on such counsel and not on any statements or
representations of the Seller or any of its agents for legal advice with respect
to this investment or the transactions contemplated by this Agreement.
5.13 The Buyer is a "distributor" as defined in Regulation S and will
send to any broker/dealer or other person receiving a commission on the sale of
the Securities, the Buyer's Warrants and the underlying Common Stock, a
confirmation or other notice stating that such person is subject to the same
restrictions on transfer to U.S. Persons or for the account of or benefit of
U.S. Persons during the Distribution Compliance Period as provided herein.
5.14 Upon any transfer of the Securities, the Buyer's Warrants or the
underlying Common Stock unless such transfer is subject to Rule 144 or is
covered by a current and effective registration statement under the Act, the
transferee must supply to the Seller with the same representations and
warranties as provided for in Section 5 hereof.
5.15 NOTWITHSTANDING ANY OTHER PROVISIONS OF THIS AGREEMENT, THE
DEBENTURES, THE WARRANTS OR THE BUYER'S WARRANTS, THE SELLER DOES NOT HAVE TO
AND WILL NOT RECOGNIZE AND WILL TREAT AS NULL AND VOID ANY ATTEMPT TO TRANSFER
THE DEBENTURES, THE WARRANTS, THE BUYER'S WARRANTS AND THE UNDERLYING COMMON
STOCK MADE IN VIOLATION OF THIS AGREEMENT OR REGULATION S OR TO EXERCISE THE
WARRANTS AND THE BUYER'S WARRANTS OTHER THAN AS PROVIDED THEREIN.
6. REGISTRATION UNDER THE SECURITIES ACT OF 1933.
(a) As soon as possible after this date (but in no case prior to the
Initial Funding Date), the Seller will include in an appropriate form of
registration statement filed under the Securities Act of 1933 (the "Act") for
resale by the potential holders (the "Buyer") the following shares of Common
Stock, but only Common Stock, of the Seller (collectively, the "Resale
Securities"):
(i) One hundred one hundred percent (100%) of the shares underlying the
Debentures, assuming the aggregate outstanding Principal Sum was Five Million
Dollars ($5,000,000) based on the conversion prices set forth in Section 3
above.
(ii) One hundred percent (100%) of the shares underlying the Warrants to
purchase for aggregate of One Million Dollars ($1,000,000) of the Common Stock
of the Seller based on an exercise price per share as set forth in Section 3
above.
(b) The Seller shall use its best efforts to cause the registration
statement provided for in Section 6(a) hereof to become effect under the Act no
latter than the ninetieth (90th) day after the Initial Funding Date; provided,
that if such registration statement has not been declared effective by the close
of such ninetieth (90th) day after the Initial Funding Date, then for each of
the next thirty (30) days after such ninetieth (90th) day after the Initial
Funding Date that such registration statement has not been declared effective,
the Seller shall pay the Holder an amount equal to the Principal Sum funded on
the Initial Funding Date times Nine Hundred Eighty Six One Thousands of a
percent (0.986%); provided further, that if such registration statement has not
been declared effective by the close of the one hundred twentieth (120th) day
after the Initial Funding Date, then for each day after such one hundred
twentieth (120th) day after the Initial Funding Date that such registration
statement has not been declared effective, the Seller shall pay the Holder and
amount equal to the Principal Sum funded on the Initial Funding Date times One
Thousand Six Hundred Four-four One Ten Thousands of a percent (0. 1644 %). Any
amounts due to the Holder under this Section 6(b) shall be paid by check no
later than the next business day after an amount is incurred.
(c) The following provision of this Section 6 shall also be applicable:
(i) The Buyer shall furnish the Seller with such appropriate
information (relating to the intentions of such holders with regard to the sale
of the Resale Securities included in the registration statement as the Seller
shall reasonably request in writing. Following the effective date of such
registration statement, the Seller shall upon the request of the Buyer forthwith
supply such a number of prospectuses meeting the requirements of the Act, as
shall be requested by the Buyer to permit the Buyer to make a public offering of
all the Resale Securities from time to time offered or sold to the Buyer
provided that the Buyer shall from time to time furnish the Seller with such
appropriate information (as provided for in the immediately proceeding sentence)
as the Seller shall request in writing and provided, further, that the Seller
shall keep such registration statement current and effective until the last to
occur of thirtieth (30th) day after the last to occur of (i) the Principal Sum
of the Debentures being reduced to zero or (ii) the first to occur of the
exercise or all of the Warrants and the Buyer's Warrants or the expiration of
the Warrants and the Buyer's Warrants. The Seller shall also use its best
efforts to qualify the Resale Securities for sale in New York and Florida,
provided that the Seller shall not be required to file a general consent to
service of process in any state pursuant to this sentence.
(ii) The Seller shall fill the registration statement at its own
expense and without charge to the Buyer. The Buyer shall, however, bear the fees
of his own counsel and any transfer taxes or underwriting discounts or
commissions applicable to the Resale Securities sold by it pursuant thereto.
(iii) The Seller shall indemnify and hold harmless the Buyer and each
underwriter, within the meaning of the Act, who may purchase from or sell for
any the Buyer any Resale Securities from and against any and all losses, claims,
damages and liabilities caused by any untrue statement or alleged untrue
statement of a material fact contained in the registration statement or any
post-effective amendment thereto under the Act or any prospectus included
therein required to be filed or furnished by reason of this Section 6 or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
except insofar as such losses, claims, damages or liabilities are caused by any
such untrue statement or alleged untrue statement or omission or alleged
omission based upon information furnished or required to be furnished in writing
to the Seller by the Buyer or underwriter expressly for use therein, which
indemnification shall include each person, if any, who controls any such
underwriter within the meaning of such Act; provided, however, that the Seller
shall not be obliged so to indemnify any such underwriter or controlling person
unless such underwriter shall at the same time indemnify the Seller, its
directors, each officer signing the related registration statement and each
person, if any, who controls the Seller within the meaning of such Act, from and
against any and all losses, claims, damages and liabilities caused by any untrue
statement or alleged untrue statement of a material fact contained in any
registration statement or any prospectus required to be filed or furnished by
reason of this Section 6 or caused by any omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, insofar as such losses, claims, damages or liabilities are
caused by any untrue statement or alleged untrue statement or omission based
upon information furnished in writing to the Seller by any such underwriter
expressly for use therein.
(iv) The Seller's agreements with respect to the Resale Securities in
this Section 6 shall continue in effect regardless or the conversion and
surrender of the Debenture or any exercise of the Warrants or the Buyer's
Warrants. The registration rights of the Buyer under this Section 6 will inure
to the benefit and be assignable automatically to any transferee of the
Securities, the Warrants, the Buyer's Warrants or the underlying Common Stock,
except for any such underlying Common Stock sold pursuant to a registration
statement under the Act or sold pursuant to Rule 144.
7. ENTIRE AGREEMENT. This Agreement, and the Exhibits hereto, embodies
the entire agreement and understanding between the parties hereto with respect
to the subject matter hereof and supersedes all prior and contemporaneous
agreements and understandings relating to such subject matter.
8. CHOICE OF LAW AND VENUE. This Agreement shall be governed by and
construed under the laws of the Province of Alberta, Canada, without regard to
choice of laws, in force from time to time. Any proceeding arising out of this
Agreement shall be brought in Ontario, Canada.
9. ATTORNEYS' FEES. In any action to enforce this Agreement, the
prevailing party shall be entitled to recover from the non-prevailing party all
reasonable costs, including, without limitation, attorneys' fees.
10. PARTIES BOUND. This Agreement is binding on and shall inure to the
benefit of the parties and their respective successors, assigns, heirs, and
legal representatives.
11. NOTICES. Except as otherwise provided herein, all notices,
instructions or other communications required or permitted hereunder shall be in
writing and sent by registered mail, postage prepaid, addressed as follows:
To Jaws Technologies Inc.
1013 17th Avenue SW
Calgary, Alberta Canada TH OA7
Fax: 403-508-5058
Voice: 403-508-5055
Attn: Robert Kubbernus
President and CEO To Thomson Kernaghan & Co. Limited:
365 Bay Street,
Toronto, Ontario Canada M5H 2V2
Fax: 416-367-8055
Voice: 416-860-8800
Attn: Robert F. Wilson
or such other address, telephone numbers or contact persons as shall be
furnished in writing by such party to the other parties hereto. Any such notice,
instruction or communication shall be deemed to have been given three (3)
business days after the date mailed by registered mail or if sent by fax, upon
electronic confirmation or receipt.
12. GENDER. Masculine nouns and pronouns shall include feminine nouns
and pronouns.
13. ARBITRATION. All disputes that may arise between the parties
regarding the interpretation or application of this Agreement and the Exhibits
thereto and the legal affect of this Agreement shall, to the exclusion of any
court of law, be arbitrated and determined by a board of arbitrators, unless the
parties can resolve the dispute by mutual agreement. Either party shall have the
right to submit any dispute to arbitration thirty (30) days after the other
party has been notified as to the nature of the dispute. If the dispute goes to
arbitration, each party shall select one arbitrator and the two arbitrators so
selected shall jointly select a third arbitrator. The arbitration shall be
governed by the arbitration rules of the International Chamber of Commerce. The
arbitration proceeding shall be governed by the statutes of the Province of
Ontario, Canada, and the proceeding shall be held in Toronto, Ontario, Canada.
Anything to the contrary contained in the above-mentioned rules and statutes
notwithstanding, the parties consent that any papers, notices, or process
necessary or proper for the institution or continuance of, or relating to any
arbitration proceeding, or for the confirmation of an award and entry of
judgment on any award made, including appeals in connection with any judgment or
award, may be served on each of the parties by registered mail addressed to the
party at the principal office of the party, or by personal service on the party
in or without the above-mentioned state. The parties recognize and consent to
the above-mentioned arbitration association's jurisdiction over each and every
one of them.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
Seller: JAWS TECHNOLOGIES, INC.
By:
Its:
Buyer: THOMSON KERNAGHAN & CO. LTD.
By:
Its:
<PAGE>
EXHIBIT LIST
Exhibit A FORM OF WARRANT TO PURCHASE SHARES OF COMMON STOCK
Exhibit B 10% CONVERTIBLE DEBENTURE
Exhibit C ESCROW AGREEMENT
Exhibit D FORM OF BUYER WARRANTS
<PAGE>
Exhibit 5.1.1 and 23.1 - Page 2
EXHIBIT 5.1.1 AND 23.1
S O N F I E L D & S O N F I E L D
A PROFESSIONAL CORPORATION
LEON SONFIELD (1865-1934). . . . . . . ATTORNEYS AT LAW
GEORGE M. SONFIELD (1899-1967)
ROBERT L. SONFIELD (1893-1972) . . . . 770 SOUTH POST OAK LANE
____________________ . . . . . . . . . HOUSTON, TEXAS 77056-1913
[email protected]
FRANKLIN D. ROOSEVELT, JR. (1914-1988)
TELECOPIER (713) 877-1547. . . . . . NEW YORK
____ . . . . . . . . . . . . . . . . LOS ANGELES
ROBERT L. SONFIELD, JR.. . .TELEPHONE (713) 877-8333 WASHINGTON, D.C.
MANAGING DIRECTOR
August , 1999
Board of Directors
JAWS Technologies, Inc.
1013 17th Avenue SW T2T 0A7
Calgary, Alberta CANADA
Dear Gentlemen:
In our capacity as counsel for JAWS Technologies, Inc. (the "Company"), we
have participated in the corporate proceedings relative to the authorization and
issuance by the Company of a maximum of 17,154,900 shares of common stock upon
the conversion of debentures and exercise of warrants owned by the selling
security holders all as set out and described in the Company's Registration
Statement on Form SB-2 (File No. 333-65583) under the Securities Act of 1933
(the "Registration Statement"). We have also participated in the preparation
and filing of the Registration Statement and the Prospectus constituting a part
of the Registration Statement.
Based upon the foregoing and upon our examination of originals (or copies
certified to our satisfaction) of such corporate records of the Company and
other documents as we have deemed necessary as a basis for the opinions
hereinafter expressed, and assuming the accuracy and completeness of all
information supplied us by the Company, having regard for the legal
considerations which we deem relevant, we are of the opinion that:
(1) The Company is a corporation duly organized and validly existing
under the laws of the State of Nevada;
(2) The Company has taken all requisite corporate action and all action
required by the laws of the State of Nevada with respect to the authorization,
issuance and sale of common stock to be issued pursuant to the Registration
Statement;
(3) The maximum of 17,154,900 shares of common stock, when issued and
distributed pursuant to the Registration Statement, will be validly issued,
fully paid and nonassessable;
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and to the references to our firm in the Registration
Statement.
Yours very truly,
/s/SONFIELD & SONFIELD
- ------------------------
SONFIELD & SONFIELD
<PAGE>
Exhibit 21 - Page 1
EXHIBIT 21
SUBSIDIARIES OF JAWS
Jaws Technologies, Inc., an Alberta corporation
<PAGE>
Exhibit 23.2 - Page 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT CHARTERED ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated March 22, 1999 except for Note 17 which is at April 26,
1999, in the Pre-effective Amendment No. 3 to the Registration Statement and
related Prospectus (Form SB-2 No. 33-65583) of Jaws Technologies Inc., a Nevada
corporation, for the Registration of 17,154,900 shares of its common stock.
Calgary, Canada Signed: Ernst & Young LLP
August 5, 1999 Chartered Accountants
